Mortgage woes keep piling up

NEW YORK -- Fallout from the meltdown in the subprime mortgage industry continued to wreak havoc on Wall Street Wednesday, as three big financial institutions revealed new financial and legal problems, and shares of the USA's leading banks and brokerage firms sank.

•Morgan Stanley estimated that its credit losses had grown by $3.7 billion since August. Two months ago, Morgan Stanley said its maximum exposure to securities comprised of subprime-related loans was $10.4 billion; with the write-down, that exposure has now been reduced to $6 billion, the company said Wednesday night. Its shares fell $3.32 to $51.19 before the news broke.

•Merrill disclosed in its quarterly earnings statement that the Securities and Exchange Commission launched an inquiry into how it accounted for its subprime-related holdings. A month ago, Merrill announced a $4.5 billion write-off associated with subprime investments, but on Oct. 24, it said the write-off had grown to $7.9 billion. Merrill shares lost $2.38 to $53.99.

The SEC often launches an informal inquiry when a public company surprises shareholders with a big negative earnings announcement.

•A Citigroup shareholder filed a lawsuit against several of the bank's top executives, including former CEO Charles Prince, who resigned Sunday, claiming breaches of fiduciary duties and poor management of corporate assets. A month ago, Citigroup had announced more than $1 billion in subprime-related losses, but over the weekend, the bank said subprime losses could grow by an additional $11 billion. Citi says the shareholder lawsuit has no merit. Its stock dropped a seventh trading day in a row, losing $1.67 to $33.41.

This is only the beginning of legal problems for the big banks and brokerage firms, says Peter Schiff, president of Euro Pacific Capital. Noting that Wall Street firms have been posting record earnings in recent years, Schiff says those earnings were based on unrealistic valuations placed on mortgage-related assets. "Wall Street is going to be restating years of good earnings and posting losses," he says.