Research Roundup: Writedown Wrapup
It is no longer a question of whether big banks and brokerages will be forced to write down their subprime-mortgage related losses. The question is how much.
Today’s Financial Times warns that the risk rises of an asset fire sale, amid signs that the M-LEC Superfund rescue plan has stalled (as suggested by Research Recap last month.) The $75 billion plan to buy up Structured Investment Vehicle assets has fallen badly behind schedule with no other banks yet making a firm commitment to join Citigroup, Bank of America and JPMorgan Chase, the FT says.
Executives at other banks believe the plan has been hurt by the turmoil at Citigroup.
“As far as we can see, it appears dead in the water right now,” said one senior Wall Street banker.
However, one person close to the plan said progress had been made on deciding what assets would be eligible and syndication of the back-up bank lines was set to start late next week, the FT says. “Some observers fear it might now prove impossible to create the superfund quickly enough to help banks deal with the funding problems dogging SIVs – off-balance sheet entities that use short-term debt to fund longer-dated investments.”
Elsewhere in the FT, Lex notes that a dazzling range of permutations exist for estimating potential losses from collateralised debt obligations. “And the $23bn of subprime write-offs so far from the three banks worst hit suggest intellectual chaos: relative to their remaining exposure to super- senior CDOs, UBS wrote down 8%, Merrill Lynch 41%, while Citigroup’s guidance is 19%.”
Subprime write-offs of $28bn for the eight big investment banks that have made disclosures are the tip of a $200bn-odd iceberg, Lex says.
The investment banks themselves may take more hits, but it is now time for the insurance companies and commercial banks that bought big slugs of CDOs to face the music.
The Wall Street Journal reports Morgan Stanley is now under the microscope as David Trone, analyst at Fox-Pitt Kelton, said it could face another $6bn of mortgage-related writedowns. Mike Mayo of Deutsche Bank put the number at closer to $3 billion. In a report featured on ResearchRecap Tuesday, CreditSights calculated Morgan Stanley’s potential writedowns at $3.8 billion, based on the decline in the ABX Index.
However, CreditSights showed this would have a smaller impact on Morgan Stanley’s leverage ratio than potential writedowns at other brokerages. Worst hit from a capital standpoint would be Bear Stearns, followed by Merrill Lynch, Lehman Brothers, Goldman Sachs and finally Morgan Stanley as the least affected of the five.
The New York Times notes that Morgan Stanley was never a big player in the subprime market. While Morgan Stanley joined the Wall Street rush into underwriting pools of securities tied to subprime mortgages, or collateralized debt obligations, in 2006 and 2007, it ranked far behind market leaders Merrill Lynch and Citigroup. Accordingly, the view has been that Morgan Stanley would not experience as big a loss, the Times reports. “But it did get swept up in the fervor, paying $700 million in late 2006 for Saxon, a subprime mortgage underwriter so it could gain access to subprime mortgages and repackage them into complex investment vehicles.
In his report, Trone wrote that the firm might have as much as $16 billion in exposure to CDOs. “We suggest an outright avoidance,” he wrote, “until either management discloses more specific exposure data and it proves smaller than we thought, or they actually take write-downs big enough to get beyond this.”
CreditSights’ analysis of potential writedowns and their impact U.S. Banks/Brokers – CDOs Top The Hit Parade; Where’s The Bottom? can be purchased here.
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November 9th, 2007 at 2:56 pm
[...] last week. More Bank, Brokerage Writedowns, Ratings Cuts Inevitable topped the charts, followed by Research Roundup: Writedown Wrapup. Readers of this post would have benefited from CreditSights estimate of a $3.8 billion writedown [...]