[Roman left this comment in my previous post: "I see that the worst isnt over yet then? Who do you think will be the next to go?" Instead of answering with a brief reply, I thought that question deserved much more consideration.]
When two of the world's largest banks announced write-downs totalling some $23 billion last week, that was bearish news to me. But, no, the market thought otherwise. The Dow Industrials gained by nearly 400 points on the same day (Tuesday) that UBS and Deutsche Bank announced their subprime related losses. For sure, this was not the first instance when bad news was treated as good news in Wall Street. In the special context, however, of the present subprime mortgage crisis, I could sense that the market is associating disclosure (no matter how bearish or bad) with imminent closure (ebbing of the crisis). If so, is the financial dawn about to break, in a manner of speaking?
Nostradamus has long been dead, and even if he were still around, he'd surely answer that question with a puzzling quatrain, which would have rendered it next to useless anyway. Fortunately, S & P published this March 13, 2008 article, which is as specific as it can get, and whose main points are as follows:
The bulk of the write-downs of subprime securities may be behind the banks and brokers that have already announced their results for full-year 2007.
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There may be some additional marks to market as market indicators have shown deterioration in the first quarter. However...the magnitude of some write-downs is greater than any reasonable estimate of ultimate losses.
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The largest players can be seen as having undertaken a rigorous valuation methodology to come up with conservative valuations.
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Even if others take more substantial additional write-downs, we do not expect them to be as great as those taken in fourth-quarter 2007.
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Further write-downs could occur in the portions of bank portfolios that are hedged by monolines...If all monolines' creditworthiness were to deteriorate to the noninvestment-grade range...banks would have to write down the value of the hedges by $38 billion, as if the hedges did not exist.
In S & P's estimate, we would see the end of this nightmarish subprime crisis when global write-downs reach a total of about $285 billion. This amount is projected to come not only from large banks and investment banks, but also from hedge funds, monoline insurers, other insurers, and other financial institutions.
Given that the aggregate write-downs which have been disclosed so far by banks has already reached some $150 billion, we are apparently past the midnight hour and are now in the very wee hours of the morning, though it's still very dark outside. Since the bulk of the write-downs to-date have come from the banks, the logical question comes to mind--what about the non-banks?
Probably, that's where the future bad news will come from, as we near the break of our metaphorical financial dawn. So, in a long-winded answer to Roman's question, should another one fall before this dawn breaks, it would likely come from these non-banks (and not Lehman Brothers, which has been the subject of intense speculation), which are not regulated by Bernanke's Fed.
(Photo credit: www.sxc.hu)
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