Friday 1 February 2008

Sub-prime losses continue; UBS write-down

A new estimate on sub-prime losses was released by S&P on Wednesday: losses are expected to reach $ 265 billion. Reuters reports that S&P "...cut or may cut its ratings on $270 billion worth of U.S. mortgage-backed securities and put $264 billion of collateralized debt obligations on watch for a possible downgrade."

The S&P report states:

Standard & Poor's Ratings Services today announced that it has placed on CreditWatch with negative implications or downgraded its ratings on 6,389 classes from U.S. residential mortgage-backed securities (RMBS) transactions backed by U.S. first-lien subprime mortgage collateral rated between January 2006 and June 2007. At the same time, it placed on CreditWatch negative 1,953 ratings from 572 global CDO of asset-backed securities (ABS) and CDO of CDO transactions.

The affected U.S. RMBS classes represent an issuance amount of approximately $270.1 billion, or approximately 46.6% of the par amount of U.S. RMBS backed by first-lien subprime mortgage loans rated by Standard & Poor's during 2006 and the first half of 2007. The CDO of ABS and CDO of CDO classes with ratings placed on CreditWatch negative represent an issuance amount of approximately $263.9 billion, which is about 35.2% of Standard & Poor's rated CDO of ABS and CDO of CDO issuance worldwide.

In December 2007, S&P quantified the volume of ARM reset loans that face interest rate adjustment at the end of 2008 at an additional $ 500 billion. (S&P 11 December 2007). S&P's After the Credit Boom, Banks and Brokers face a Troubling Year in 2008. states that the declared write-down of CDOs, subprime RMBS and leverages loans as of 17.01.2008 was $ 90.7 billion:

Merrill Lynch .... $ 22.0 bln
Citigroup ........ $ 21.0 bln
UBS .............. $ 14.8 bln
Morgan Stanley ... $ 9.6 bln
13 Others* ........$ 23.3 bln

* BoA, Barclays, Bear Stearns, BNP Paribas, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, ING, JP Morgan Chase, Lehman Bros, RBS, SocGen,

This is before UBS wrote down a further $ 4 billion this week, bringing its total losses to over $ 18 billion. Ben Bernanke testified that total losses would not exceed $ 500 billion, but that was before two rate cuts. Yet more earnings announcements will follow this month. Expect losses.

Still no data on how the 2 rate cuts will affect sub-prime and ALT-A repayments by borrowers. The situation should improve with a Fed date of 3%, although mortgage rates have not fallen by the same magnitude - yet.

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