The worst of the bank writedowns finally behind us? Billions at last kitchen-sinked? Not so much.
Structured finance instruments are about to be hit hard again by two powerful headwinds: first, the consequences of the Lehman bankruptcy and the subsequent ructions on the credit markets and second, a continuing deterioration in the fundamentals underlying the structures.
Standard & Poor’s today released a revision of its writedown estimates for global financial institutions. On subprime instruments alone, S&P are revising northward their writedown projections from $285bn to $378bn.
Aiming the analysis at a wider range of MBS that have lost value since summer 2007 expands the potential for write-downs to well over $500 billion.
This, though, is really the killer line:
The market is still searching for an equilibrium price on trillions of dollars of structured securities, in particular at the higher end of the ratings spectrum.
And the collapse of Lehman hasn’t even yet begun to make itself fully felt.
Meanwhile, the outlook on fundamentals:
These have all been significantly revised. What’s also interesting is that S&P now goes so far as to model loss assumptions on structured assets which are being held to maturity (some banks, like BARC, have classified the assets thusly so that they don’t have to take mark-to-market, or model, writedowns on them).
Our hold-to-maturity estimate of ultimate losses for the wider range of MBS is $437 billion–and $482 billion including leveraged loans (see table 10). This estimate is the sum of the cumulative projected losses in the nonprime MBS segments, with ABS CDOs representing well over half of the projected total.
The key thing here though is that the hold to maturity losses modelled by S&P ($437bn) are pretty close to the mark-to-market writedowns projected.
In other words, the notion of “markups” to come as the markets recover is flawed.
Oh. One more thing.
At origin, we rated ‘AAA’ approximately 80%, or $960 billion, of the $1.2 trillion in subprime RMBS issued 2005 through 2007