$231 Billion in Writedowns and Credit Losses: The List of Mortgage Players Grows Larger.

Yesterday UBS AG said it would write down a staggering $19 billion on assets connected to mortgage assets. The figure is staggering yet the market rallied nearly 400 points on this news. Have we reached a turning point where writedowns simply do not matter? This figure was the largest since the writedowns started last year. Writedowns occur when investment banks mark their assets to market and the value has declined. Commercial banks on the other hand take credit losses or charge offs when the same occurs with their assets should they default or decline in value. It is amazing that we have now reached $231 billion in writedowns and we still have more sub-prime mortgages that will default this year and the battle of the Alt-A and Option ARM mortgages are nowhere on the radar screen. If there was any other proof that investment banks need more regulation let us look at the entire list of writedowns (all numbers below in billions):

Firm Writedown Credit Loss (a) Total
UBS

38

 

38

Merrill Lynch

25.1

 

25.1

Citigroup

21.4

2.5

23.9

HSBC

3

9.4

12.4

Morgan Stanley

11.7

 

11.7

IKB Deutsche

9

 

9

Bank of America

7.3

0.9

8.2

Deutsche Bank

7.4

 

7.4

Credit Agricole

6.5

 

6.5

Credit Suisse

6.3

 

6.3

Washington Mutual

0.3

5.5

5.8

JPMorgan Chase

2.9

2.1

5

Wachovia

2.9

2

4.9

Canadian Imperial (CIBC)

4

 

4

Societe Generale

3.8

 

3.8

Mizuho Financial Group

3.4

 

3.4

Lehman Brothers

3.3

 

3.3

Barclays

3.2

 

3.2

Royal Bank of Scotland

3.1

 

3.1

Goldman Sachs

3

 

3

Dresdner

2.7

 

2.7

Bear Stearns

2.6

 

2.6

ABN Amro

2.4

 

2.4

Fortis

2.3

 

2.3

Natixis

1.9

 

1.9

HSH Nordbank

1.7

 

1.7

Wells Fargo

0.3

1.4

1.7

BNP Paribas

1.3

0.3

1.6

DZ Bank

1.5

 

1.5

National City

0.4

1

1.4

Bank of China

1.3

 

1.3

Bayerische Landesbank

1.3

 

1.3

Caisse d`Epargne

1.3

 

1.3

LB Baden-Wuerttemberg

1.3

 

1.3

Nomura Holdings

1

 

1

Sumitomo Mitsui

1

 

1

Gulf International

1

 

1

European banks not listed above (b)

8.4

 

8.4

Asian banks not listed above ©

4

0.7

4.7

Canadian banks excluding CIBC (d)

2.4

0.1

2.5

Totals

206

25.8

231.8

What you’ll notice on the list above is losses from investment banks and commercial banks related to their mortgage assets. What is incredible is investment banks are responsible for nearly 90 percent of all the aggregate writedowns. Take a look at a few big commercial banks above and you’ll realize that there is a reason for regulation. For example Wells Fargo and Bank of America have not suffered as deeply as many of the investment banks on the list. The new proposals for regulating investment banks are warranted but what is the use of peering into their books if nothing is going to be enforced? There will be a fierce battle to keep things status quo because looking above, we realize that these investment banks have been gambling for many years and now they have doubled-down on 16.

Another fascinating bit of information is we are well beyond the Fed’s prediction last year that when all was said and done, we would be seeing $50 to $100 billion in total writedowns. We are now double that and places such as Goldman Sachs have predicted writedowns totaling $460 billion. If we are to look at the raw number of loans resetting and sub-prime debt still out there, we may well surpass that $460 billion number. That is why the Fed is giving up on its rate cutting jawboning because what is the point of injecting liquidity when the problem is flat out solvency ala Bear Stearns? They brought a knife to a gun fight. All the new facilities being engaged and down right bailing out of an investment bank show their panic. If anything, it has placated the markets for the time being but that doesn’t change the inevitable. They’ve used nearly all their ammunition and we are not even half way through the correction.

That is why the government is now looking to step in with a $300 billion bail out package that would allow the government to buy poor performing mortgages through government sponsored entities. Given that they will purchase loans at values that are below market, it will shift the risk from the private sector onto the balance sheet of the American public. This will create a moral hazard since any investment bank in the future will realize if things get really bad, they always have the ultimate back stop of the federal government. If we are to enact new regulation and put investment banks in the same category as commercial banks with all the government insurance at their disposal, we need to have complete access and regulating authority over them. Just look at the list above! How well did the market work when they were given free reign?

They were the ultimate sinners in this mess. They clearly do not have the self regulating over sight that will protect the well being of the country. And all those that cry free market when they hear regulation are rolling up to the government corporate welfare line when things get bad. If anything, they are more socialist than they would like to admit. What we have done is created a new gambling casino and its address isn’t in Vegas but falls squarely on Wall Street and other financial hubs around the world. If you look at the list above, it appears that the entire world got caught up in this investment greed. Nothing was created from this. At least with the technology bubble with for example, Global Crossing excess cable was placed around the world that provided massive utility. What of the writedowns above on now defaulting and non-performing mortgages? Nothing is left behind except a large bill for the American tax payer.

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2 Comments on this post

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  1. nom said:

    “It is amazing that we have now reached $231 billion in writedowns and we still have more sub-prime mortgages that will default this year”

    Writedowns include future forecasts of defaults. So the sub-prime mortgages set to default, are actually included in the 231.

    Most banks are using “worst-case scenario” assumptions in their models to flush out and account for all expected losses.

    It will be interesting to see, however, which banks have higher defaults than their “worst-case scenarios”!

    April 3rd, 2008 at 9:39 am
  2. mybudget360 said:

    The more pressing question will come once we see the impact of Pay Option ARMs and also Alt-A mortgages. We are already seeing defaults in prime mortgages rising simply because of the oncoming recession.

    April 5th, 2008 at 6:09 pm

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