If the weather isn’t getting you down then the steady stream of bad news from across the pond will help blacken your mood. Russ Mould looks for the silver lining

The losses are stacking up. $9.4 billion at Morgan Stanley (MS:NYSE), $10 billion at UBS (UBS:NYSE). $14.6 billion at Merrill Lynch (MER:NYSE), and $18 billion at Citigroup (C:NYSE). The latest round of debt-market deficits from the world’s leading banks are terrifying.

But you get to a point where the news gets so bad, the numbers so mind-bogglingly huge, where traders are so punch drunk, that the swathes of red ink no longer really matter, particularly as Merrill, UBS and Citi have raised $45 billion between them to repair the damage. The story now is what are the implications of their latest losses. There is good news here.

Firstly, the banks who needed cash to bolster their balance sheets have been able to find it. Willing capital providers have included sovereign wealth funds and government-backed investment vehicles, such as Government of Singapore, Abu Dhabi Investment Authority and the Kuwaiti Investment Authority. Secondly, Citi’s shares went up after its latest loss revelations, suggesting a lot of bad news is now in the price.

Unfortunately, there is bad news, too.

Firstly, the fresh cash has come at a cost. Citigroup’s raising last November was via convertible debt with an 11% interest rate, while UBS has sold convertibles yielding 9%.

Secondly, a period of increased risk aversion seems likely as the banks lick their wounds. Bankers are likely to be less generous with the credit which has done so much to oil the economic wheels this century, putting the brakes on global growth.

Thirdly, Citigroup cut its fourth quarter dividend by 41%. UK banks may look cheap on a PE or yield basis, but this could therefore be because analysts’ earnings and dividend forecasts are too optimistic.

Fourthly, Bank of America’s (BAC:NYSE) bid $4 billion for stricken US mortgage lender Countrywide Financial (CFC:NYSE) came in stock, not cash, and to a value of $7.16 per share, below the $7.75 Countrywide had reached beforehand. Countrywide’s shares have since slumped to just $5.48.

Fifthly, and most ominously, Citi wrote off $5.4 billion on its credit card exposure. Fellow financial services firms American Express (AXP:NYSE) took a $440 million charge last week and Capital One (COF:NYSE) slashed earnings guidance by 20% last week. Both flagged rising payment delinquencies. This has stoked fears of a major downturn in US consumer spending, and therefore a recession, since the consumer represents about 70% of US GDP.

No wonder Fed Chairman Ben Bernanke’s recent statements have hinted at an acceleration in US interest rate cuts when the Fed next meets on January 30. A 50 bp cut to 3.75% has been all but priced in by debt markets already.

Traders took the view in August and November last year, after prior Fed cuts and hopes the banks had got all of the bad news out of the way – that the worst was over. Markets rallied. Yet fingers were burnt then and it still feels too early to buy the banks now.

But if the broader markets capitulate banks could prove the first place to look for value. Ian Harnett of Absolute Strategy Research told Shares just before Christmas, ‘Banks outperform [in a slowdown] when everything else has been trashed as they benefit from the steepening yield curve. Lloyds TSB (LLOY) might be an interesting one for 2008.’

Shares says: Stick to secular growth stocks for now, although investors with an appetite for risk should look at Lloyds TSB and Barclays (BARC).