Interest Rate Roundup

Thursday, March 13, 2008

A bold call from S&P? Or a premature one?

Here's an interesting call out of S&P this morning -- one that has given the market a boost since it's so out of left field. The only problem is that EVEN if S&P is right and the subprime-related writedowns are behind us, we've moved far beyond the time when this was just a subprime mortgage crisis. Financial firms are experiencing big problems with Alt-A loans ... commercial MBS ... hung LBO loans ... auto and credit card losses ... and so on. Anyway, here's the meat of S&P's call:

"Standard & Poor's Ratings Services believes that the bulk of the write-downs of subprime securities may be behind the banks and brokers that have already announced their results for full-year 2007. There may be some additional marks to market as market indicators have shown deterioration in the first quarter. However, when we dissect the percentage of write-downs taken against various types of exposures, in our opinion the magnitude of some write-downs is greater than any reasonable estimate of ultimate losses.

"The write-downs of collateralized debt obligations (CDOs) of subprime asset-backed securities (ABS) by large banks and investment banks (referred to as banks) in North America and Europe to-date total approximately $110 billion. To this amount we add approximately $40 billion in write-downs of insurers (financial guarantors and other insurers) and banks in the Gulf States and Asia to arrive at a rough estimate of $150 billion in global disclosed write-downs to-date.

"Most of the write-downs have been on the so-called supersenior tranches of CDOs of subprime ABS. To date, banks have written down their unhedged supersenior CDOs of ABS by more than $65 billion. On an original exposure of about $160 billion, this represents about a 40% discount. However, that discount percentage varies tremendously from institution to institution."


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