Total losses stemming from writing down the value of mortgage-linked securities could be
as high as $200 billion, with financial institutions sitting on at least $60 billion in losses that have not yet been disclosed, JPMorgan said Monday.
Banks and insurers, including Merrill Lynch, Ambac Financial Group and MBIA have reported
third-quarter losses as they write down the value of securities, including collateralized debt obligations, or CDOs, backed by residential mortgages.
There is much more to come, JPMorgan analyst Chistopher Flanagan said on a conference call with clients.
Based on the pricing of key derivative indexes tied to residential mortgages, known as the ABX indexes, there are $200 billion in losses related to looming defaults by residential and commercial mortgage borrowers, and only $30 billion to $40 billion has thus far been recognized in financial reporting, he said.
Not all losses will be at financial companies, and "banks, brokers, mortgage and monoline insurers will bear the brunt of this loss recognition," he said.
At least $100 billion of losses likely reside at financial companies, which leaves $60 billion to $70 billion unaccounted for, he said.
"The implications of this expectation are obviously somewhat staggering, if not tough to comprehend, which is why we think denial of the reality of it remains so persistent,"
Flanagan said.
Companies have been writing down the value of CDOs backed by mortgages based on pricing that is more favorable than that of the ABX indexes, but Flanagan said the ABX prices are more
accurate.
The ABX indexes have sold off persistently, with the "AAA" rated index backed by loans made in the second half of 2006 dropping to around 82 cents on the dollar, from above par in
January. At the same time, the "BBB-minus"-rated index has plunged to 18 cents on the dollar, from 97 cents at the beginning of the year.
"We continue to think that as losses are recognized, it will broaden into a consumer-focused credit crunch, that in turn will cause consumer credit to deteriorate," Flanagan said.