Subprime Investors And Investment Banks Face Billions Of Additional Losses


The credit crisis precipitated by the ongoing subprime debacle is likely to result in billions of dollars in additional losses for investors and investment banks. Fitch recently reported that writedowns for CDOs and subprime related losses already totaled $150 billion, but various experts believe that reported losses don’t begin to reflect the true extent of losses actually sustained in the recent downturn.

Now, UBS estimates that the world banks face the risk of up to an additional $203 billion in writedowns. Specifically, UBS has reported that CDOs could result in an additional $120 billion in losses for the banks and that the banks have an additional $83 billion in losses from structured investment vehicles (SIVs), commercial mortgage backed securities, and leveraged buyouts.

For institutional and individual investors, the situation may be even more serious. Recent investigations begun by criminal prosecutors and the SEC have raised serious questions about the valuations that various investment banks have placed on CDOs and subprime related loans. This, in turn, has raised questions about whether institutional and individual investors are really aware of what their holdings are worth.

Several recent reports have suggested that the senior-most classes of CDOs, those with the least risk, are worth somewhere between 15% and 35% of face value. Jody Shenn of reported on February 5, 2008 that “investors with experience with residential mortgage assets have been buyers, paying in the ‘mid-teens to low 30’ cents on the dollar for the senior-most or super-senior, classes of CDOs comprised of low-rated asset-backed bonds,” according to Merrill Lynch managing director Brian Carosielli. Similarly, in recent months, E-Trade liquidated a $3 billion portfolio of CDOs and subprime related securities for a reported 27% of face value and Credit Suisse reportedly liquidated Adams Square I CDO for less than 25 cents on the dollar.

In these uncertain times, institutional and individual investors are urged to contact their advisers to determine the nature and extent of their subprime exposure and how such exposure is being valued.