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Report: Sub-Prime Losses Could Reach $500 Billion Worldwide

Nov. 12, 2007 (EIRNS)—A new report out today from Deutsche Bank, says that bank losses from the continuing collapse of the subprime mortgage securities could eventually reach $300 billion to $400 billion worldwide. Wall Street alone will be forced to write down as much as $130 billion, with the rest of the losses coming from smaller banks and investors in mortgage-related securities. Already last month, Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley each announced write-downs in the ten's of billions of dollars, led by Citigroup with writedowns of more than $40 billion. Report author John Mayo expects total writedowns at HSBC, UBS AG, Royal Bank of Scotland Group Plc and Barclays Plc to be "ballpark $5 billion or so" each. This could cause major problems for banks—HSBC, for example, has $45 billion mortgage services business, and only $2.1 billion in loss provisions. Mayo apparently makes no estimate of what Deutsche Bank's own losses might be.

According to the report, subprime borrowers are likely to eventulaly default on 30 percent to 40 percent of all outstanding debt. For a $1.2 trillion subprime mortgage market, that figure could easily approach $500 billion. This year alone, having already announced losses totalling over $40 billion, banks and brokers may have to write off an additional $25 billion, for a total of between $60 and $70 billion. These figures could well be much larger, since, as Mayo admits, he was going by "seat-of-the-pants" calculations, based on published figures, which in many cases have proven to be—shall we say—"conservative."

In addition, loss rates on about $200 billion of securities based on derivatives linked to subprime debt will run to as high as 80%, according to the DB report, which would amount to $160 billion. Coverage by Bloomberg news notes that a Lehman Brothers report from last week found that Commercial banks, government- chartered firms Fannie Mae and Freddie Mac, and mortgage and bond insurers will be the most affected by mortgage losses. "We're not out of the woods yet," one fund manager told Bloomberg. "There are more losses to be taken and there's more negative news to come."

One should note that these bonds were all rated "AAA" investment quality, just six months ago.