As the selling of bank shares has fallen off, Wall St. has begun to believe that the worst of the global banking crisis is in the rear view mirror. Not likely. If investors are surprised that Citigroup (C) fell from $55 to $23, imagine the shock if the bank’s shares move to $15. It has happened before.

UBS (UBS) was hit with another write-down for its subprime assets. That brings their total to $18 billion. The bank’s loss for the last nine months of the year is over $11 billion. Losses at Societe Generale may have been caused in part by one trader, but the financial firm also took large mortgage-related write-offs.

UBS says it still has $29 billion in subprime holdings. Citi puts that number at closer to $37 billion. The idea that the value of those holdings is suddenly going to get better in a worsening housing market is counterintuitive. It is also probably just plain wrong.

While the State of NY is trying to strong-arm banks to put up $15 billion in credits for Ambac (ABK) and MBIA (MBI), the fact of the matter is that the bond ratings of those agencies could be cut at any time. If they are, the value of the bonds they insure will almost certainly drop. Big banks have exposure to that pool of debt. Bingo. Another round of lay-offs.

Consumer credit is also worsening. Car and credit card debt pools will be beaten up as 2008 goes on. A look at earnings at American Express (AXP) shows the process has already begun. Large banks hold some of the securities backed by these loans.

One estimate puts total subprime write-downs by banks at $130 billion in 2007. The amount of exposure left on balance sheets could be at least that much again and that does not take into account problems at bond insurers and with consumer debt.

Write-offs in Q1 and Q2 of this year will be stupendous. Count on it.

Douglas A. McIntyre

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