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Thursday, January 31, 2008


s&p spreads the damage

via bloomberg:

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 cut or put on review yesterday 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.

it may be important to note that s&p is not "estimating", at least in the conventional sense, the figure of $265bn. they are calculating how their ratings changes will formulaically affect loss reserves in fiduciary institutions.

Accounting rules have allowed many financial companies to avoid writing down their holdings to market prices until the credit ratings fall if they intended to keep them until maturity or hold them for long periods. S&P said it will review the ratings of smaller banks that are ``thinly capitalized.'' It didn't name any of the institutions.

major banks are largely unaffected by these imminent reratings, but it does highlight the extent to which many smaller banks have not even begun the process of reassessing their balance sheets.

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