S&P Downgrades To Push Losses Over $265 Billion
According to Wall Street Journal reporters Aaron Lucchetti and Serena Ng, Standard & Poor’s downgraded or threatened to downgrade over 8,000 mortgages investments and projected that a widening array of financial institutions will face losses totaling more than $265 billion. These downgrades will create more turmoil in a market already reeling from at least $100 billion in write-downs.
S&P suggested that many financial institutions would have to sell some of the bonds affected by its ratings action. It expects that losses will more than double and will affect many firms that have not yet acknowledged the problem. While these new downgrades may not hurt the banks that have already taken large write-downs, the impact could spread to regional banks, credit unions, government-sponsored businesses as well as European and Asian banks that have not yet taken a write-down.
To date, S&P has lowered its credit rating on 3,787 classes of subprime mortgage bonds. The ratings of an additional 2,602 bonds were placed on "credit watch negative," which means that a downgrade is a distinct possibility. The credit ratings for 1,953 collateralized debt obligations (CDOs) backed by mortgage bonds were downgraded or threatened to be downgraded.
S&P's rating decisions have affected some $534 billion in mortgage-related investments, including 47% of subprime mortgage bonds rated in 2006 and the first half of 2007. Its decisions also affected $264 billion in CDOs – 35% of such instruments sold worldwide during that same period.
The mortgage meltdown will most likely continue. S&P’s economist, David Wyss, estimates that national home-price declines could reach 13% by year-end and bottom out in early 2009. Analysts estimate that loss on mortgages – even those that do not go into mortgage-backed securities – could be as much as $400 billion when the ink dries
