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Guest mSparks

Bank Writedowns

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Guest mSparks
Mark Zandi, an economist at Moody's, who is tracking the housing market, expects the fall in house prices to accelerate from 5% this year to 10% in 2008.

Are the writedowns that have been announced so far based on just the current loss in current value of all these mortgage based securities, or the loss in capital valuation of the underlying assets (i.e. homes) and do they take into account the forecasts for US housing over the next few years?

Originally during the writedowns I thought 'OK MBS's have dropped 60% in value, they over devaluate the writedown and everything is rosy next year'

Now Im thinking these writedowns don't even become to come close to the overstatement in earnings over the last 10 years throughout the banking sector (which theoretically could take out half the banking institutions).

Any ideas how best to guage this?

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Are the writedowns that have been announced so far based on just the current loss in current value of all these mortgage based securities, or the loss in capital valuation of the underlying assets (i.e. homes) and do they take into account the forecasts for US housing over the next few years?

Originally during the writedowns I thought 'OK MBS's have dropped 60% in value, they over devaluate the writedown and everything is rosy next year'

Now Im thinking these writedowns don't even become to come close to the overstatement in earnings over the last 10 years throughout the banking sector (which theoretically could take out half the banking institutions).

Any ideas how best to guage this?

A bankster lady on bloomberg a few weeks ago said the banks were having "diffculty" putting values on the writedowns of unsaleable assetts, so they guess. Course, the value is not anything if nobosy wants to buy.

I would hazard a guess that the total number of these things are well known to the CBs, but, in order for there to be an orderly reset over a long period of time, ie, make it manageable, the CBs are agreeing to write downs on an "acceptable" percentage, increasing the percentage as the crisis progresses.

This would enable them to trade through the crisis, and preserve the capital of banks at lesser cost to the taxpayer.

the oposite, a write off of all at market value would have been meltdown in a day! IMHO.

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Guest mSparks
Banks' valuations of their collateralized debt obligations holdings, one of the financial instruments worst hit by the credit crunch, vary far more than previously thought according to independent research provider CreditSights.

The differing valuations, combined with a further slide in subprime assets this year, could potentially lead to first quarter CDO writedowns of up to $3 billion (EUR1.9 billion) for several banks and as much as EUR6 billion for UBS, according to CreditSights analysts Simon Adamson and John Raymond in a report published late yesterday.

UBS has the largest exposure of any European bank, the report said.

Adamson and Raymond wrote: "Barclays, RBS and Societe Generale are holding their super senior (asset-backed securities) CDOs (high-grade and mezzanine combined) at well over 70% of face value, whereas Fortis is at 55%. The differences are even starker on the mezzanine tranches, ranging from 20% of face value at Dresdner to 80% at SocGen."

Several banks have started to make more detailed disclosures on their ABS CDO holdings, which are portfolios of asset-backed securities that are divided into slices with different risk profiles and returns.

Banks justify their different valuations, which are derived from models, according to the exposure in these CDOs to subprime assets, and their level of subordination - or the amount of losses a portfolio has to experience before a tranche suffers any loss.

Other factors include the year in which mortgage loans were originated, known as vintage, with those that contain mortgages from 2006 and 2007 deemed most at risk to losses. Banks have also hedged their portfolios differently, which also impacts valuations.

However, CreditSights analysts conclude that even taking into account these caveats, "the difference in writedown ratios between the banks is surprising".

The valuations of high-grade CDOs have fallen from 79% of face value to 69% between the end of December and March 14 and mezzanine tranches have fallen from 35% to 18% over the same period, according to modeled estimates by CreditSights. Mezzanine debt is a type of junior credit with equity characteristics.

Based on its estimated marks, CreditSights believes Barclays Bank, Royal Bank of Scotland, Societe Generale and UBS are the least conservative banks. Barclays, RBS and SocGen may face another $1 billion to $3 billion in writedowns on collateralized debt obligation holdings and UBS, with its larger exposure, between $3 billion and $6 billion.

They said Fortis appears to have been more conservative than the other banks, having written down its high-grade CDOs to 57% and its mezzanine to 43%. It was also the only bank to have made writedowns in excess of CreditSights' modeled losses under every scenario apart from one.

Adamson and Raymond said the first-quarter writedowns would likely be absorbed with reasonable comfort and would be smaller than in the second half of last year.

They said the UBS portfolio is vulnerable because almost 80% of its gross CDO exposure is in mezzanine tranches, and two-thirds of the collateral is in mortgages originated in 2006 and 2007, which are the vintages with the greatest default expectations. Most of the mezzanine portion is marked to 53% of face value.

SocGen also has a large part of its CDO exposure to mezzanine tranches, with 64% out of a gross exposure of EUR4.9 billion ($7.7 billion) in mezzanine.

Barclays Bank, which has a gross CDO exposure of GBP6.1 billion ($12.2 billion) also faces further writedowns this year, according to CreditSights. That is despite the relatively higher quality of its holdings, where 79% of its super senior ABS CDO exposure is to vintages of 2005, or earlier, where default rates are lower.

Barclays is scheduled to provide a first-quarter trading update May 15, but will not report fully until its half-year results in August.

Web site: http://www.efinancialnews.com

(END) Dow Jones Newswires

March 19, 2008 10:27 ET (14:27 GMT)

looks like guesswork is a bit of an understatement.

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  • 298 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
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