The Wall Street Journal-20080122-Will Bets Haunt Societe Generale-- Write-Downs Expected As Mortgage-Loan Risk May Be Underestimated
Return to: The_Wall_Street_Journal-20080122
Will Bets Haunt Societe Generale?; Write-Downs Expected As Mortgage-Loan Risk May Be Underestimated
Investors are bracing for a new wave of disclosures in coming weeks that European financial firms made much bigger, and unsuccessful, bets on securities tied to U.S. mortgage loans than previously thought.
Shares in France's Societe Generale SA tumbled for the second trading day in a row yesterday on analysts' predictions that France's second-largest bank by market value may have to write down the value of its portfolio of complex debt securities tied to U.S. subprime mortgages by as much as 1.5 billion euros ($2.19 billion).
Analysts said investors also fear the bank's exposure to these securities, which are known as collateralized debt obligations, or CDOs, is higher than what the company disclosed in November. The fears come amid German bank write-downs.
Societe Generale declined to comment. Societe Generale shares fell 8% to 78.52 euros ($114.78) yesterday in Paris, following an 8.2% drop Friday. The market malaise affected shares in other French banks, with BNP Paribas -- the country's largest by market capitalization -- falling 9.6% by the end of trading.
Switzerland's UBS AG and the United Kingdom's Barclays PLC and Royal Bank of Scotland Group PLC, all of which have recorded billions of dollars in write-downs, report results next month. Additional write- downs from those banks could push concern about global banking health well into the second quarter.
German banks, including Commerzbank AG and WestLB AG, yesterday told investors to expect more write-downs. Shortly before the new year, French bank Credit Agricole said a new write-down of its CDOs would take a $1.6 billion toll on 2007 earnings.
France's banking regulator, however, stuck to its reassuring message: "As we said since the beginning of the crisis, French banks have limited exposure to U.S. subprime products," a spokewoman at the Bank of France said yesterday. "We consider that French banks will emerge from the crisis without major trouble."
Despite the reassurances, analysts said yesterday that Societe Generale would be next in line for a write-down of its CDO portfolio.
"Given the depreciation announced by other banks, it seems inconceivable that Societe Generale will not need to mark down further its own portfolio," said Pascal Decque, an analyst with French bank Natixis SA. In November, when it released earnings for the third quarter, the bank said its portfolio of CDOs was valued 4.83 billion euros after a depreciation of 230 million euros, or about 4.5%.
Mr. Decque said he expects Societe Generale will have to announce an additional 1.5 billion euros in asset depreciation between now and the release of its fourth-quarter earnings, scheduled on Feb. 21.
