Bank of America in sub-prime hit

Banks have been hit by record defaults on sub-prime mortgages

Bank of America has revealed that it will have to write off $3bn (£1.4bn) of bad debts and warned that its losses could grow.

It is to spend another $600m supporting some of its funds because the value of their investments is uncertain.

But Bank of America said that it considered the potential losses to be "manageable".

It is the latest bank to reveal losses as a result of investments linked to the US sub-prime home loans market.

Citigroup has already said it will write down as much as $11bn and Morgan Stanley expects to write off up to $6bn before the end of the year.

But there was some better news from Goldman Sachs on Tuesday.

Its chief executive Lloyd Blankfein told a conference that his bank would not have to take significant charges to cover sub-prime losses.

Impossible to value

Sub-prime mortgages are offered to people with inferior credit records or unpredictable incomes.

A vast number of these loans were dished out over the past few years when borrowing costs were cheaper and more affordable.

But a steep rise in US interest rates over the past two years has resulted in many borrowers unable to pay these mortgage repayments, leading to record defaults and foreclosures.

It then turned out that the debt from sub-prime loans had been packaged together and sold to other banks around the world.

Because the market for such debt has largely disappeared, banks are left holding debt to which it is almost impossible to attach a value.