The Hits Just Keep Coming–BBB Bonds at 20% of Value
In spite of the Fed’s valiant attempt to provide liquidity Wall Street banks and brokers still have far too much exposure to mounting credit crunch losses. The Fed reportedly pumped another $40 billion or so into the financial system last week, in addition to it’s cut in the Fed funds rate. But it’s still not enough.According to an article in the Financial Times, there was a “sharp fall” recently in a key derivative index that tracks the market for risky sub-prime debt. In fact, this index “has fallen about 30 per cent since the end of September.”
Is this an indication of another leg down for the financial sector amid a worsening credit crunch?
“Bonds rated BBB- are now trading at a record low of just 20 cents on the dollar”, according to the article. This latest plunge in sub-prime bonds comes after many big banks had already closed their books last quarter, indicating more losses ahead for mortgage-backed debt holders in the fourth quarter. Mortgage data also shows a “marked acceleration in late payments and defaults on mortgages” in recent weeks.
In the current credit environment, borrowers still face limited refinancing options even for prime-rated borrowers, and for sub-prime…forget it! That market has pretty much shut down, since lenders can no longer package and sell new sub-prime mortgage originations.
Many sub-prime firms have gone belly-up already, and many more are headed that way. This signals a big increase in delinquencies and loan losses yet to come.
The Hits that Keep on Coming
It’s pretty clear that the Fed’s 75 basis points of easing since mid-September was aimed squarely at bailing out Wall Street, rather than providing a lift to the overall economy that clearly doesn’t need the help.
Wall Street has now written-off more than $30 billion in sub-prime related loan losses in the past few months alone, and still counting.
However “private sector economists think the total loss from mortgage problems could reach $200 billion or more, according to the Financial Times. “What everyone keeps asking is where are those losses sitting.”
Since Wall Street has so far only fessed up to $30 billion in “asset impairment charges” (aka “losses”), the $170 billion question is: where’s the rest buried? In other words, who’s holding the bag on the balance of $170 billion in potential losses? Again, from the Financial Times: “To judge from secondary market prices, losses on mortgage inventory are likely to be larger in the fourth quarter than the third quarter.”
Expect More Wall Street Losses After Thanksgiving
Many big Wall Street firms have a fiscal year that ends in November, so that they can close out their books well before year-end, giving them more time to calculate year-end bonuses. But it may be a blue Christmas this year on Wall Street. That’s because closing out the books at the end of this month means marking to market even more of those mortgage-backed loans and derivatives of questionable value. I see more losses and charge offs in the not too distant future for Wall Street.
Here are a few things that are crystal clear in my mind:
1. Sub-prime adjustable-rate mortgage loans are already defaulting in record numbers: up about 100% year over year in the past five months.
2. The number of adjustable-rate mortgages resetting will increase in 2008 - almost surely resulting in higher default rates. The peak in resets is still months away.
3. Much of this toxic sub-prime paper was sliced, diced, and repackaged by Wall Street into collateralized debt securities in recent years.
4. These complex Wall Street issued mortgage-backed securities are now defaulting in record numbers (please see yesterday’s news).
According to the FT article: “The multi-layered nature of these complex financial flows means it is hard to assess how defaults by homeowners will affect the value of related securities.”
Translation: nobody really knows how many more losses Wall Street will suffer going forward. But it’s a safe bet to assume it will be much more than we’ve heard about so far. Stay tuned!
Posted at 07:57 AM in Current Affairs, Domestic Investing, Economy, Financial, Global Markets, Real Estate, Stock Market, Trading | Permalink TrackBack TrackBack URL for this entry:
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