Standard & Poor's

S&P raises write-down estimate but says end in sight for subprime crisis

PUBLISHED : Saturday, 15 March, 2008, 12:00am
UPDATED : Saturday, 15 March, 2008, 12:00am

Standard & Poor's, the ratings company criticised for missing the beginning of the mortgage collapse, now says the end of subprime write-downs is in sight.

Write-downs from subprime-tied securities would probably rise to US$285 billion, or US$20 billion more than the agency forecast two months ago, S&P said on Thursday.

More than US$150 billion had been reported already by banks, brokers and insurers, the firm said.

S&P raised its estimate as it assumed deeper losses on collateralised debt obligations.

'There'll be plenty of trouble around this quarter, but it's just not going to be as much subprime trouble,' said Tanya Azarchs, S&P's managing director for financial institutions.

The world's largest banks and securities firms - led by Citigroup, UBS and Merrill Lynch - have reported more than US$188 billion of mortgage-related losses since the beginning of last year, according to data.

Subprime write-downs were coming not only at banks, brokers and insurers but also hedge funds and institutional investors, S&P said.

S&P's report helped prompt a rally in United States stocks and a decline in treasuries on Thursday.

S&P, Moody's Investors Service and Fitch Ratings have been criticised by lawmakers and regulators for failing to anticipate the record home foreclosures that led to a slump in securities linked to mortgages to people with poor credit.

S&P has assigned AAA ratings to about 85 per cent of mortgage collateralised debt obligations classes created in 2005, 2006 and last year, according to the report.

Some AAA classes of collateralised debt obligations lost all of their value last year.

'I don't want to be unduly sceptical here but the basis of the comments from S&P, I believe, require further examination,' said Mike Mett, a retired lawyer and former counsel to the Wisconsin securities commissioner.

On Thursday, US Secretary of the Treasury Henry Paulson delivered recommendations from the President's Working Group on Financial Markets in response to 'market turmoil' that included reforms of ratings-firm rules to ensure 'integrity and transparency' and reviews by regulators of how they used their assessments.

S&P's report focused on US subprime asset-backed securities, and did not take into account losses on such loans that have not been packaged into bonds.

Prices of bonds directly backed by subprime loans were little changed on Thursday after rising off record lows earlier this week, Markit ABX indices indicated.

'It is clear that the ultimate credit losses on the more than US$1.2 trillion of subprime loans originally granted in the US from 2005 to 2007 will be substantial,' S&P said.

Large banks such as Citigroup and Merrill Lynch 'have rigorously and conservatively valued their exposures', S&P said.

'Most of the damage should be behind them,' it said. 'Indeed, these institutions may benefit from future recoveries in market prices if the performance of subprime borrowers stabilises and risk premiums for uncertainties dissipate.'

The agency said it now expected larger losses from 'high-grade' collateralised debt obligations used to repackage asset-backed securities with AAA, AA or A ratings into new debt.

Optimistic view

S&P says losses will continue but will not be only subprime problems

Agency says write-downs from subprime-related securities will probably reach, in US$: $285b