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Subprime Losses May Reach $400 Billion, Analysts Say (Update5)
By John Glover
Nov. 12 (Bloomberg) -- 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 today by New York- based credit analyst Mike Mayo,. The rest of the losses will come from smaller banks and investors in mortgage-related securities.
Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley led more than $40 billion of writedowns as record U.S. foreclosures plundered asset prices. Estimates are rising with Lehman Brothers Holdings Inc. last week predicting losses linked to U.S. mortgages may reach $250 billion over the next five years. Zurich-based Credit Suisse Group in July forecast $52 billion of costs related to mortgage-backed securities.
``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.''
Morgan Stanley analyst Anil Agarwal in Hong Kong today cut his rating on the stock of HSBC Holdings Plc to ``equal-weight'' from ``overweight.'' 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 writedowns at HSBC, UBS AG, Royal Bank of Scotland Group Plc and Barclays Plc to be ``ballpark $5 billion or so'' each, he said.
Subprime Defaults
Subprime borrowers are likely to default on 30 percent to 40 percent of debt, Mayo wrote. Losses on loans to people with poor credit histories may be as much as half the sum lent, Mayo wrote. The forecasts on total writedowns 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 writedowns at Frankfurt-based Deutsche Bank, which were 2.16 billion euros ($3.15 billion) in the third quarter.
Bonds Plunge
Subprime-mortgage bonds have plunged this year. One ABX index linked to securities that initially carried the lowest investment-grade rating has fallen 39 percent in the past month, according to Markit Group Ltd., the London-based index administrator.
About $1.2 trillion of the $10 trillion of outstanding U.S. home loans are considered to be subprime, Mayo said in the note.
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.
Commercial banks, government-chartered firms Fannie Mae and Freddie Mac, and mortgage and bond insurers will be affected the most by mortgage losses, which will be about $50 billion in 2008, Lehman Brothers analysts wrote on Nov. 5.
``While this is large relative to historical losses on mortgage portfolios, it is about half the size of losses on corporate portfolios during 2002,'' when long-distance telephone company Worldcom Inc. went bankrupt, Lehman analysts wrote.
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 Corp. 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.
To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net
Last Updated: November 12, 2007 10:53 EST
