1. Unresolved uncertainty. Citigroup's staggering write-down might not be its last. Remember, today's $17 billion subprime-related write-down is sharply higher than the $8 billion to $11 billion it had estimated. The market for these mortgage-related assets is so dry that they have become extremely difficult to value.
      All banks holding such assets can expect similar problems until demand for them returns. So, even after they report billion-dollar write-downs of their own in coming weeks, banks can't rule out the possibility of more—perhaps even larger—write-downs in the future. No one can say for sure—and that's just the problem. "Citigroup's numbers don't resolve uncertainty at all," says banking consultant Bert Ely. "The only way that the uncertainty will be resolved is with the passage of time as we work through these problems." Ely thinks that could take two to three years.
      2. Consumer loans cracking. Although its subprime-related problems will grab the headlines, Citigroup's consumer lending write-downs are perhaps a more ominous sign for the banking industry and the economy as a whole. Citigroup jacked up its provision for credit losses by $3.3 billion, because it expects higher delinquencies on credit cards, auto loans, unsecured personal loans, and mortgages. This is fresh evidence that mortgage-related problems have seeped into consumer lending. American Express said Thursday that lower cardholder spending and higher delinquencies would lead to a $440 million pretax charge to its fourth quarter. That came the same day Capital One Financial slashed its 2008 profit forecast by more than 20 percent to reflect weakness in its consumer lending business. Matthew McCormick, a bank analyst at Bahl & Gaynor Investment Counsel, says that higher consumer loan losses will be "the next shoe to drop" at banks across the industry.
      3. Commercial headaches. Consumer loans aren't the only potentially emerging problem for the banking industry. Citigroup also reported that net income from its commercial lending business had declined, blaming higher expected losses and "trends in the macroeconomic environment." Other big banks are likely to fess up to similar troubles when they report earnings soon. And as the U.S. economy slows, commercial lending problems could certainly increase.
      4. Less lending. Big write-downs reduce the capital that banks have to work with. That, in turn, can limit their willingness to lend. This can hit bank profits since, after all, banks are in the business of lending money, and less lending can lead to less revenue. It can have a much more profound impact on the economy as a whole—since it chokes off the flow of capital to businesses and consumers. "The average consumer is potentially going to face a much more difficult time getting auto loans, home loans, potentially credit card loans, school loans," McCormick says. "When banks tighten their credit, everyone suffers."
      5. Shady swaps. The financial system could face even more problems from a little-known corner of the credit market: credit default swaps. These instruments are basically insurance policies purchased by investors—including many lenders—to protect against default. With corporate default rates low in recent years, credit default swaps provided a safe and consistent earnings stream to sellers. But with the United States heading into a period of slower growth, and maybe a recession, the default rate is expected to increase. Bill Gross of Pacific Investment Management estimates that such defaults will result in about $250 billion of losses in 2008. Taken together, higher credit card delinquencies, commercial real-estate losses, a reduced appetite for lending, and $250 billion in credit default swap losses create "a recipe for a contraction in credit leading to a recession," Gross says in his most recent investment outlook.