$300 Billion of CDO Losses Factored into Stock Prices
Projected subprime-related losses of around $300 billion are already largely factored in to bank stock prices, the Organization for Economic Cooperation and Development says.
This means either that the equity market now risks overshooting on the downside, the OECD says in a new paper, and should begin to stabilize and bounce; or that the quantification of losses is less than what is likely to happen – either because of subprime and Alt-A losses being larger, or because other assets like credit card receivables and corporate debt will deteriorate somewhat more as the economic slowdown unfolds.
At this stage, however, it is safe to say that equity markets are factoring in a lot of bad news as it concerns mortgage turmoil, and that this is certainly on the high side of that implied by the other information presented in the paper.
“Provided the feedback effects of credit supply on the economy do not cause it to slow too much, credit card issues (which depend on interest rates and holding your job) and corporate bonds (which depend on rates and earnings) should be manageable.”
The OECD paper Structured Products: Implications for Financial Markets, also provides a helpful explanation of the complex structure of the Structured Investment Vehicle conduit business model.
The nature of the crisis from here is likely to be ‘strung out’ with more bumps along the way, the OECD says, adding that the M-LEC SIV rescue fund may be useful in providing time for problems to work their way thrugh the financial system.
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November 30th, 2007 at 12:45 pm
[...] damage has been taken into account. This may be borne out by the most popular post of the week $300 Billion of CDO Losses Factored into Stock Prices, drawn from the OECD’s analysis of the credit [...]