S&P Sees More ‘Write-Downs’ Coming

September 23, 2008

A report from Standard & Poor’s Ratings Services’ Paris office – “Global Financial Institutions Eye Another Wave Of Write-Downs As U.S. Housing Woes Spread -” forecasts that global financial institutions “will face more securities write-downs combined with rising loan losses in the second half of 2008.”

Credit analyst Scott Bugie warned: “The overlap of these two phases may prove to be the most difficult test yet for the battered global financial sector.” S&P said it believes “that turbulent capital market conditions and continuing negative news from the U.S. mortgage market will lead to another large wave of write-downs in the second half of 2008.”

S&P also noted that the “financial industry raised a huge amount of capital over the past year to compensate for securities losses. The present market conditions are less favorable, and financial institutions face this next wave of write-downs with reduced opportunities to raise additional capital.”

“The success in future capital raising, through issues or asset sales, to compensate for additional securities write-downs, will be the key factor driving the credit ratings on many global financial institutions in the second half of this year,” Bugie added.

Global financial “pain,” while widespread, “remains largely linked to the declining fortunes of the U.S. housing sector,” said S&P. “Securities backed by U.S. mortgage loans have lost hundreds of billions of dollars in value since summer 2007. The losses have spread beyond subprime, which represents only 10 to15 percent of residential real estate borrowing in the U.S., to other pressured areas of U.S. housing finance.

“Three prominent players–Citigroup Inc. (AA-/Negative/A-1+), Merrill Lynch & Co. Inc. (A/Watch Dev/A-1), and UBS AG (AA-/Negative/A-1+)–account for 40 percent of the more than $300 billion in write-downs of mortgage-backed securities (MBS) and leveraged loans taken through the first half of 2008.

“Beyond that concentration, the write-downs have been spread geographically and by institution. Intermediaries and investors across the globe took part in the financing of highly leveraged U.S. households during the boom years; they consequently are bearing their share of losses from the decline.”

The report indicates that “true sales of nonprime MBS in 2008 have been at depressed prices. The stunning collapse of Lehman Brothers Holdings Inc. (D/–/D) and the unwinding of the group’s trades surely will place additional downward pressure on values of nonprime MBS via forced sales under unfavorable market conditions. ”

S&P’s report also said that “the global industry likely has passed the halfway mark for write-downs.” But, it continued, “a wider range of MBS segments are at risk and all segments of MBS have deteriorated in recent months. We expect financial institutions with material residual balances of nonprime MBS to take significant additional write-downs in second-half 2008. In fact, this has already begun with the third-quarter earnings releases of the U.S. broker-dealers.”

The report is available to subscribers of RatingsDirect, the real-time Web-based source for S&P’s credit ratings, research, and risk analysis, at: www.ratingsdirect.com . If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to: research_request@standardandpoors.com . Ratings information can also be found on Standard & Poor’s public Web site at: www.standardandpoors.com.

Source: Standard & Poor’s

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