Global losses may top $300B

Nov 13, 2007

Miami Herald, 11/13/2007
SUBPRIME CRISIS Analysts are raising their estimates on asset losses significantly as defaults and foreclosures on subprime loans increase. Posted on Tue, Nov. 13, 2007 AIM reprint print email By JOHN GLOVER Bloomberg News Losses from the falling value of subprime mortgage assets may reach $300 billion to $400 billion worldwide, Deutsche Bank AG analysts said.

Wall Street’s largest banks and brokers will be forced to write down as much as $130 billion because of the slump in subprime-related debt, according to a report Monday by Mike Mayo, a New York-based analyst. The rest of the losses will come from smaller banks and investors in mortgage-related securities.

Citigroup, Merrill Lynch and Morgan Stanley led more than $40 billion of write-downs as record U.S. foreclosures plundered asset prices. About $1.2 trillion of the $10 trillion of outstanding U.S. home loans are considered to be subprime, Mayo said in the note.

”We’re not out of the woods yet,” said Mondher Bettaieb- Loriot, who helps manage the equivalent of about $58 billion at Swisscanto Asset Management in Zurich. ”There are more losses to be taken and there’s more negative news to come. At some point it will be a buying opportunity but we’re not there yet.”

Deutsche Bank expects 30 percent to 40 percent of subprime debt to default. Losses on loans to people with poor credit histories may be as much as half the sum lent, Mayo wrote. The forecasts on total write-downs are based on ”seat-of-the-pants” estimates using losses announced by the biggest securities firms, he said.

Banks and brokers may have to write off $60 billion to $70 billion this year, Mayo wrote. The estimate is based on known charges of $43 billion and expected additional losses of $25 billion.

The report didn’t include write-downs at Frankfurt-based Deutsche Bank, which were 2.16 billion euros ($3.15 billion) in the third quarter.

Loss rates on about $200 billion of securities based on derivatives linked to subprime debt will run to as high as 80 percent, Mayo wrote.


Estimates of losses have soared this year as defaults and foreclosures increased.

Total write-downs from subprime slump may be as much as $250 billion over the next five years, Lehman Brothers Holdings analysts said. Credit Suisse Group in Zurich estimated in July that the total would be as much as $52 billion. Pacific Investment Management in Newport Beach, Calif., in April put the fallout at $75 billion.

Morgan Stanley analyst Anil Agarwal in Hong Kong cut his rating on the stock of HSBC Holdings to ”equal-weight” from ”overweight” on Monday. The London-based lender’s $2.1 billion of provisions against its $45 billion mortgage services business may be insufficient, he said.

Deutsche Bank’s Mayo expects write-downs at HSBC, UBS AG, Royal Bank of Scotland Group and Barclays to be ”ballpark $5 billion or so” each, he said.


Credit-default swaps on the iTraxx Financial Index of 25 European banks and insurance companies increased 3 basis points to 56 basis points. The benchmark reached a record 60 basis points on Aug. 16 when U.S. mortgage lender Countrywide Financial drew on emergency funding to stay afloat.

The index, a benchmark for the cost of protecting bonds against default, rises when perceptions of credit quality worsen.

Deutsche Bank plans to hold a conference call on subprime debt on Nov. 15, according to the note.