Transcripts

The Citigroup Billion Dollar Loss Barometer

SUSIE GHARIB: Citigroup reported a $2.5 billion quarterly loss today but investors were relieved it wasn't worse. The nation's largest bank wrote down another $7 billion in bad assets, an improvement over the $12 billion figure in the previous quarter. Citi lost $0.54 a share in the second quarter, much smaller than the $0.66 loss analysts were expecting. Revenues fell 29 percent to $18.7 billion. Citi's chief financial officer said today he thinks it will be another 2 to 4 quarters before the firm's mortgage and credit card losses peak. Nevertheless, Citi's shares rose more than 7.5 percent. Well Citi's results powered up other financial stocks which rallied for the third straight day. So does that mean the worst of the credit crisis is over? As Washington bureau chief, Darren Gersh, reports, there's still much debate on that subject.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: In stock market land, Citigroup shares rallied on hopes banks have finally turned the corner on the credit crunch. But in credit land, the folks who deal in debt and bonds are far from convinced. CDR chief credit strategist, Tim Backshall, says banks are still carrying around a basket of assets they aren't sure how to value.

TIM BACKSHALL, CHIEF CREDIT STRATEGIST, CDR: And of course, a lot of what goes in there are the mortgage backed securities and the asset backed securities that have been such a pain over the last few months. And with Citi and with a number of others that's been the big fear. And I think the credit market could see through some of that.

GERSH: We are now approaching the one year anniversary of the credit crunch that began after the collapse of two Bear Stearns (BSC) hedge funds last July. This chart shows the counterparty risk index, it's a good measure of how far we have come. It shows the cost of insuring against a default by some of the largest banks in the world, almost like financial life insurance. According to the index, the cost to insure a $10 million bond from a big bank has tripled over the past 12 months, and hasn't Been this high since Bear Stearns collapsed in March. Tim Backshall says the bottom line is this: the credit crunch has cost $400 billion so far and He sees another $800 billion to $900 billion in write-downs to go.

BACKSHALL: A lot of people are looking for the light at the end of this tunnel, unfortunately, the further we go, the more we realize it may actually be a cave.

GERSH: Former senior Federal Reserve policy maker Vince Reinhart says the credit crunch will end when banks have raised the money they need to make up for their huge losses, But how fast that happens depends on the strength of the economy and the weakness in the Housing market.

VINCENT REINHART, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: If house prices are seen as continuing to fall, and no sense of where the bottom is, somebody's willingness to put funds into a firm that is sensitive to house prices is pretty limited.

GERSH: If you want to know how scared many investors still Are, consider this. The price of insurance against the possibility the U.S. Treasury will default on the nation's debt doubled over the Last week. The risk of a credit default by the United States is still very low, but it's now higher than for Germany and France. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.