well, speaking of shoes..... (not sure if this was already posted)
iht.com
Subprime mortgage crisis far from over, "survivors' conference" hears
By Lisa Kassenaar Bloomberg News
NEW YORK: They dubbed it "The Survivors' Conference." In early November, 2,000 people who handled asset-backed securities for a living crowded into a hotel ballroom in Orlando, Florida, to hear speaker after speaker explain why 2008 may be their worst year ever.
The subprime mortgage crisis, which claimed the jobs of three chief executives and prompted more than $45 billion in write-downs at the world's biggest banks, may end up spilling into 2009.
"These events tend to become deeper and play out longer than most people initially expect," said Michael Mayo, an analyst covering securities firms at Deutsche Bank in New York. "This is one of the slowest moving train wrecks we've seen."
The tumbling U.S. housing market will continue to inflict the damage. Mortgage-backed securities and collateralized debt obligations containing those securities are falling in price and will not find their footing anytime soon. That was because most of the subprime mortgages, which provided collateral for $800 billion in securities, had yet to go bad, said Christopher Whalen of Institutional Risk Analytics in Hawthorne, California.
"The collateral is not yet problematic," Whalen said. "That's the next big shoe to drop."
Whalen said defaults would soar as rates moved up on low-interest "teaser" mortgages held by borrowers with poor credit. At the end of August, about $46 billion in subprime mortgage loans, representing 225,000 homes, had gone into default, according to Credit Suisse Group. The number will more than triple to $143 billion by the middle of 2009, the bank forecasts. Total subprime loan defaults will top out at about $270 billion, or 1.52 million homes, in 2010 or later.
"Until housing prices bottom out, the write-downs won't stop," said Peter Kovalski, who helps manage more than $12 billion at Alpine Woods Investments in Purchase, New York. "The Street wants things right away, but it doesn't work that way."
The write-downs of banks include assets that they classify as level 3, an accounting category which indicates the holdings are so illiquid that they can only be priced using the firm's own valuation models.
The amount of level 3 assets held by Goldman Sachs Group rose by 33 percent in the third quarter of 2007 from the prior period because it was stuck with loans when the leveraged buyout market froze. Level 3 assets accounted for 6.9 percent of the firm's $1.05 trillion total at the end of August, according to a government filing. Citigroup classified 5.7 percent of its assets as level 3 on Sept. 30.
The total global loss from the subprime mortgage mess, Mayo of Deutsche Bank said this month, could reach $400 billion.
Rating companies, under fire from investors for applying their highest ratings to CDOs that included securities backed by subprime loans, are downgrading the debt. Late last month, Moody's Investors Service cut ratings on CDOs tied to $33 billion of subprime mortgage securities.
The ratings firm also threatened to downgrade structured investment vehicles with CDOs managed by Citigroup and HSBC Holdings after two structured investment vehicles defaulted in October. Moody's says it assumes the investment vehicles are unwinding their assets, selling at distressed prices, to refinance their maturing commercial paper. The so-called Super SIV, a fund set up by banks at the urging of the U.S. Treasury to buy the highest-rated securities, will seek to prevent a meltdown of the 30 investment vehicles globally holding $320 billion as of Oct. 5.
Wall Street profits are also plunging in the fourth quarter. Citigroup, the second-largest CDO issuer in the first half of 2007, may post a loss in the final period, according to the average estimate of 23 analysts compiled by Bloomberg News. That is after the bank reported a write-down of as much as $11 billion, which cost Citigroup's chief executive, Charles Prince 3rd, his job.
At the five biggest securities firms - Lehman Brothers Holdings, Morgan Stanley, Bear Stearns, Goldman Sachs and Merrill Lynch - earnings are expected to fall 8.3 percent in 2007 from a record $30.6 billion in 2006, according to analyst estimates.
Lower profits mean more firings. Bank of America, JPMorgan Chase, Bear Stearns, Citigroup, Lehman Brothers and Morgan Stanley announced more than 24,000 job cuts in the first 10 months of 2007. Gustavo Dolfino, president of the New York-based executive search firm Whiterock Group, said he expected the firms to fire another 5,000 to 10,000 people this year.
The subprime mortgage debacle may echo through the economy the way the popping of the Internet bubble did - hurting consumers and growth years later. The 39 percent drop in the Nasdaq composite index in 2000 eventually led people to yank money from their mutual funds, Mayo said. The U.S. economy fell into recession in March 2001.
Bose George, an analyst at Keefe, Bruyette & Woods attending the conference for the first time, has an equally glum outlook on the already slowing U.S. economy. He says a decline in home equity loans will curtail consumer spending.
"Credit is a huge driver of growth, and it's hard to see how this isn't going to have an impact on the economy," George said. "Things are going to get worse." |
