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The Honolulu Advertiser
Posted on: Friday, February 1, 2008

Losses tied to subprime fiasco may top $265 billion

By Jody Shenn and David Mildenberg
Bloomberg News Service

ISLAND REAL ESTATE

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NEW YORK — Losses from securities linked to subprime mortgages may exceed $265 billion as regional U.S. banks, credit unions and overseas financial institutions write down the value of their holdings, according to Standard & Poor's.

S&P on Wednesday cut or put on review the ratings on $534 billion of bonds and collateralized debt obligations tied to home loans made to people with poor credit, the most by the New York-based firm in response to rising mortgage delinquencies. Moody's Investors Service today said losses from mortgages that were packaged into bonds in 2006 could rise to 18 percent.

While banks and securities firms such as Citigroup Inc. and Merrill Lynch & Co. accounted for most of the $90 billion in writedowns to date, S&P said the next wave may descend on regional U.S. banks, Asian banks and some large European banks. The ratings actions may create a "ripple impact" that further reduces debt prices, S&P said.

"There's a lack of confidence in the markets, and this exacerbates that," said Anthony Davis, a banking analyst at Stifel Nicolaus & Co. in Florham Park, N.J. "This will have a chilling effect on the markets."

Almost half the subprime bonds rated by S&P in 2006 and early 2007 were cut or placed on review, also potentially forcing credit unions and government-sponsored enterprises such as Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks to write down their holdings, the firm said.

The securities represent $270.1 billion of subprime mortgage bonds and $263.9 billion of CDOs. About 35 percent of all CDOs composed of asset-backed securities were put under review, S&P said.

"It is difficult to predict the magnitude of any such effect, but we believe it will have implications for trading revenues, general business activity and liquidity for the banks," S&P said in a statement yesterday.

Some of the largest banks have already taken "significant" losses related to subprime mortgages and CDOs and aren't likely to report more writedowns, S&P said. CDOs package assets into new securities with varying degrees of risk, from AAA to unrated classes.

Moody's, also based in New York, said it expects mortgage losses to reach between 14 percent and 18 percent. Loan performance "is proving to be much worse than in prior years and is demonstrating a progressive deterioration," Moody's Chief Credit Officer Nicolas Weill said in a statement.

MBIA Inc., the biggest bond insurer, said yesterday it lost $3.4 billion last quarter marking down the value of guarantees on residential and commercial mortgage bonds, as well as CDOs. Bristol-Myers Squibb Co., the New York-based drug maker, today reported a $275 million fourth-quarter expense on investments in auction-rate notes sold by CDOs, including subprime-tied ones.

European bank stocks fell on concern that losses at bond insurers will threaten profits at financial companies.

The risk of companies defaulting soared. The cost of credit- default swaps on the benchmark Markit CDX North America Investment Grade Index rose 3 basis points to 110.6, according to Deutsche Bank AG, indicating deterioration in the perception of credit quality. The contracts, based on bonds and loans, are used to bet on a company's ability to repay debt.