Fears of further multibillion-dollar writedowns from US sub-prime mortgage investments shook the City yesterday, as UBS took an additional $10 billion (£4.9 billion) hit and analysts said that November had been the worst month yet for banks.

UBS wrote down $10 billion of investments in bad American debt and was forced to tap two new investors for a SwFr13 billion (£5.6 billion) injection to its tier 1 capital, as part of a SwFr19.4 billion (£8.4 billion) recapitalisation. The world’s largest wealth manager warned shareholders that it was likely to make a full-year loss as it stripped them of their cash dividend.

The writedown came after UBS tightened its models to mark-to-market mortgage-related investments. Marcel Rohner, the chief executive of UBS, said that there had been a “continuous deterioration” in the sub-prime market in November, “partly driven by increased homeowner delinquencies but mainly fuelled by worsening market expectations”.

Other banks that gave loss estimates a month or more ago, before they were hit by the November downturn, may now have to revisit their own models. Analysts at Dresdner Kleinwort said: “We believe there is a non-trivial risk of further writedowns”. Another analyst said: “This means that there might be more writedowns in the fourth quarter for the entire industry”. Shares in UBS closed up 1.4 per cent at SwFr58.

Société Générale, the French bank, yesterday said it would bail out its structured investment vehicle (SIV) with a $4.3 billion credit line. It also moved the SIV’s assets to its own balance sheet. SIVs have been damaged by suspicion over sub-prime mortgages.

Dresdner Kleinwort is reported to be making more than 200 staff redundant as it struggles, in particular, with its credit business.

Yesterday the Bank of America closed the Columbia money market fund it managed on behalf of institutions after clients rushed to withdraw their cash following substantial losses on investments related to sub-prime mortgages. The fund, which had $33 billion of assets two weeks ago, closed with less than $11 billion after the losses and redemptions.

The sub-prime crisis continued to hammer at the prospects for the US economy. Morgan Stanley gave warning that “a mild recession is likely, with no growth for the year ahead”. The report added: “As delinquencies and defaults soar, lenders and investors are tightening credit for commercial, credit card and auto lending, as well as for mortgage borrowers.”

Morgan Stanley’s warning came after the ABX.HE 07-index, which measures changes in the value of American sub-prime mortgage debt, declined by 12 per cent between November 15 and November 26. This is the biggest drop in the history of the index and is fuelling a broader credit crunch that analysts say is so serious that the approximately $50 billion of sub-prime mortgage-related losses the Wall Street banks have announced so far is likely to grow substantially.

Whitney's warning

Meredith Whitney, the CIBC analyst who prompted a $369 billion (£181 billion) drop in the value of US shares on November 1 by issuing a negative note on Citigroup, yesterday warned that America was in the middle of “the worst credit market ever” (Tom Bawden writes).

Ms Whitney, who received death threats after her Citigroup note, added that the bank’s estimated fourth-quarter writedowns of between $8 billion and $11 billion will probably end up being “50 per cent higher”.

The analyst said that the credit crunch would continue to deteriorate, wiping a further $2 billion to $5 billion from the value of UBS’s portfolio of mortgage-related investments next year. These would be in addition to the $10 billion fourth-quarter writedown UBS announced yesterday.

Ms Whitney said: “The last two or three weeks of November were the worst weeks in the credit market. The volatility meant clients simply stopped trading and the liquidity just came out of the market. The scale of this credit crunch is staggering, especially when you consider that the biggest loss any bank - UBS - made on the 1998 Long-Term Capital Management meltdown was $800 million.”

Since Ms Whitney’s predictions, Citigroup’s chairman and chief executive Charles Prince has resigned, the bank has admitted up to $11 billion of fourth-quarter write-offs due to losses on bonds backed by sub-prime mortgages and it has agreed a $7.5 billion injection from the Abu Dhabi Investment Authority.

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