Armageddon situation: ACA's bonds from A to CCC, a grade colloquially referred to as "junk".

"I would recommend all of you visit London and New York in the near future just to see the effect of what is really happening there," Mr Smith said. "This is a financial services bloodbath and I think the Australian banking system is in remarkably good shape in comparison."Turmoil from the US subprime crisis is gathering momentum, with ANZ Bank saying its dealings with companies strained by the global debacle will wipe away first-half profit growth. ANZ shares lost 6% on the announcement that the bank would have to hold back about $367 million from profit for the six months to March 31, most of it the result of dealings with companies struggling in the global credit market.
The shares closed $1.45 lower at $22.46. ANZ chief executive Mike Smith stressed that, were it not for the one-off provisions, profit would have grown by more than last year's 11.5%.This suggests at least $334 million profit growth before provisions.Mr Smith used that point to emphasise the underlying strength of Australia's banking sector in hard times.
ANZ will put aside $US200 million ($A220 million) as a provision against agreements it entered into with New York-based bond insurer ACA Capital, which has become imperilled as billions of dollars in loans given to people in the US with poor credit have failed.
Credit ratings agency Standard & Poor's in December cut its rating on ACA's bonds from A to CCC, a grade colloquially referred to as "junk".
The provision is taken against "credit default swaps" entered into between 2005 and February last year. Credit default swaps are "derivative" agreements investors use to protect themselves against debt defaults.
ANZ also added $90 million to its general provision that loans might fail because of its dealings with property manager Centro. Centro has fallen into strife as it tries to refinance $3.6 billion in debt in markets hit by the subprime fallout.
Mr Smith said accounting standards required the bank to account for the losses on the derivatives, though it was likely they would regain their value when conditions changed.
An ANZ spokesman said the companies represented included Fortune 500 companies in the US and Western Europe.
"For ANZ to experience an actual loss on this exposure, it would require a significant number of what is a large and well-diversified portfolio of corporate names to go belly-up around the world," Mr Smith said.
"If that happens, we're looking at an Armageddon situation.
"Really, we would be the last things you would have to worry about if that happened."