S&P Sees End to Subprime Mortgage Writedowns


Standard & Poor's on Thursday said subprime write-downs for large financial institutions are likely past the halfway mark, but they could still hit $285 billion.

S&P's estimate of write-downs was up from a $265 billion figure it published in January, but the credit ratings agency said the end to subprime write-downs was in sight.

"The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime asset-backed securities," S&P credit analyst Scott Bugie said in a report.

More write-downs could be in store outside the subprime sector, however, S&P cautioned.

S&P's statement gave a boost to financial stocks and helped Wall Street indexes pare losses.

Lehman, Merrill Shares Gain Ground

The Amex Securities Broker/Dealer index, which includes investment banks and brokerages, shed nearly 5 percent before the report. It was last up 0.7 percent.

"We believe that the largest players, such as Merrill Lynch and Citigroup , have rigorously and conservatively valued their exposures to subprime asset-backed securities such that most of the damage should be behind them," S&P said.

Shares of Lehman Brothers , down nearly 5 percent before the S&P report, reversed those losses and wound up rising 2.31 percent.

Shares of Merrill Lynch , which had been down 2.5 percent, closed 2.98 percent higher on the day.

The U.S. investment grade credit derivative index also retraced an earlier widening. The index traded at 187.5 basis points, after earlier trading as wide as 196.5 basis points, according to Markit Intraday. It had closed on Wednesday at 183 basis points.

S&P also said some subprime mortgage write-downs are larger than any reasonable estimate of actual losses.

$150 Billion in Write-Downs to Date

The rating agency noted, however, that the positive impact of subprime disclosures and write-downs is offset by worsening U.S. housing and credit markets.

"What was surprising to me in the report was that S&P said that we may be near the end for write-downs on subprime mortgages," said Mike Kagawa, portfolio manager at Payden & Rygel in Los Angeles. "They must be seeing something I'm not. I just don't see it."

Financial institutions globally have already taken about $150 billion of subprime-related write-downs, S&P estimated. The write-downs have taken a major toll on banks' balance sheets, making them reluctant to extend credit and triggering a chain reaction of margin calls and forced selling across an array of markets.

In the latest fallout, a fund affiliated with buyout firm Carlyle Group said late on Wednesday its lenders were likely to seize its remaining assets after it defaulted on about $16.6 billion of debt.

"A major repricing of credit risk is taking place across the debt markets, with credit spreads having further widened in most segments since the beginning of 2008," S&P said. If spreads remain wide, financial institutions could suffer more write-downs beyond the subprime sector, such as in leveraged loans, S&P said.