So what are we looking at when it comes to subprime writedowns? Figures out there are at variance, but two things seem clear: banks’ assumptions so far have either been blindly optimistic or they are out of date.
Here’s a quick roundup:
In a note yesterday, Citigroup analyst Matt King estimated that the market faced writedowns of $64bn on CDOs – although bizarrely that figure excluded the data for Citi itself. That figure would also trump Citi’s earlier estimates – of mortgage linked writedowns for the whole market of $64bn, of which just $44bn was in CDOs.
JP Morgan came in with an ever so slightly more bearish total market writedown figure of $60-70bn. Trumped by the Bank of England, with an estimate of $100bn.
All of which – added together – almost reach the estimate made by Greenwich Capital, a division of RBS, who predict $238bn of mortgage-linked writedowns.
The reality of the situation is that the market is moving extremely fast – and estimates are no sooner made than out of date. All of the above figures rely on current market pricing estimates. The Bank of England’s $100bn figure, for example, was made on October 15 and is based on mark-to-market pricing taken during the first half of the month. The ABX index has plunged since then, leading Lex, among others, to suggest a revised BoE figure of $150bn.
But even that number may need to be re-crunched. Take a look at the latest ABX graphs for AAA debt (yes, we know the criticisms, but ABX might be more accurate than some would suggest). It’s tanked in the last few days – falling nearly 10 points since Monday, the fastest drop yet:
Which makes Greenwich Capital’s estimate of $238bn look like the most realistic of the lot. And now Greenwich’s parent, RBS, has issued its own even more cautionary note – from its head of credit research Bob Janjuah:
This credit crisis, when all is out, will see $250 billion to $500 billion of losses.
Basically, in addition to what has the current potential for writedowns, Janjuah expects it to become increasingly hard for banks to obfuscate and mark their assets under “level three” accounting rules. Changes in the FASB rulebook coming into effect on November 15 will put the heat on banks “marking to myth”. Says Janjuah:
It is inevitable that more players will have to revalue at least a decent portion of assets they currently value using mark-to-make believe.
And as well as the above predictions, there is another approach. Moody’s economy.com service makes estimates “from the bottom up”, rather than “marking to market” – so it doesn’t rely on maligned indices like the ABX. Taking subprime, Alt-A and jumbo loans, and assuming an economic slowdown and a 12 per cent fall in house prices from their peak, Moody’s generates roughly a 10 per cent loss rate. That translates into a $225bn hit – taken mostly on securitised products.
That figure is in line with the current chart topper from RBS. What’s more, based on fundamentals, it would seem to indicate that markets have their prices right, and the indices aren’t all that much off kilter.
But most striking of all, just compare those $200bn mortgage market figures to the aggregate writedown taken by banks so far. Between the big eight, it’s just $28bn.