Skip to main content

Sub-Prime Losses Overstated?

WSJ: A key measure of estimating the value of subprime mortgage-backed securities may be overstating potential losses of triple-A securities by more than 60%, according to the Bank for International Settlements, which puts its own estimate of such losses at US$73 billion.

The BIS, often called the central bankers' central bank, has few formal banking duties but is a hub for economic and monetary research as well as for global policy makers. Its most recent quarterly report adds to growing criticism of a key measure of the subprime-mortgage market called the ABX.

Launched more than two years ago by Markit Group Ltd., the ABX is an index that tracks the value of securities backed by subprime loans. ABX is based on credit-default swaps: actively traded instruments that insure against default on the securities.

The index often is used by banks and other organizations as a proxy for the value of mortgage-backed securities. Echoing other concerns, the BIS says the ABX prices may be unreliable because the indexes only cover a small percentage of the market. Some observers also contend that ABX prices have been driven lower largely by bearish traders.

The BIS also says the ABX indexes may misrepresent the structure of the securities they claim to reflect. The specific triple-A securities referenced by the index, in the case of a default, would be paid only after all other triple-A obligations had been met. Recalculating with new data for triple-A securities that would get paid faster, the BIS says the ABX overestimates triple-A losses by 62%.

The BIS says the value of subprime mortgage-backed securities outstanding issued from 2004-07 is about US$600 billion. At the end of May, the report says, ABX prices suggested a value of about 59 cents on the dollar for such securities, indicating losses of about $250 billion, almost half of which -- US$119 billion -- would come from triple-A securities.

Under the BIS's new calculations, losses on triple-A securities total only US$73 billion. That would bring the total subprime-mortgage-related losses down some 18%, to US$205 billion.

Comment: This is highly significant for the investing landscape going forward. BIS is highly respected and their findings are usually highly accurate and fair as well. That being the case, this lends a lot more weight to a potential super bull run in 2H2008. As I expect the oil price bubble to be deflated by then, a drop back to US$100-110 would act as a good deflator of inflationary pressures. This in turn should ignite a bull run for equities. Soon as funds start to swish around, there will be greater re-evaluation of the sub-prime write offs as being too severe. Analysts will then be trying to estimate the amount available for banks to write back some of the losses, thus adding to the equity upswing. Very important news to digest and keep in mind.

p/s photos: Ying Chatcha Rujirano


Encik Wan said…
I do not know who to believe in.

"BIS says the ABX overestimates triple-A losses by 62%."

I am sure people in BIS are smart, so are people behind derivatives, rating agencies, LIBOR, central banks etc.

Anyway I am going to 'buy insurance'
1. Reduce expenses and try to increase incomes.
2. Reduce percentage of financial assets in my portfolio substantially.
Opine said…
The next shoe to drop i think is the derivatives market, namely CDS, the amounts of total derivative trades are just staggering :-

The gross market value of credit default swaps, which measures the cost of replacing all existing contracts, almost tripled to $2 trillion in the second half of 2007, compared with a rise of 53 percent in the first half, the BIS said.

Credit-default swaps, which make up the majority of credit derivatives, are financial instruments investors use to speculate on the ability of companies to repay debt or hedge against the risk they won't.


To support your crude oil decrease in price argument:-

Oil shortage a myth, says industry insider

Although it is contrary to my belief that oil price will move upwards still.

Good news is that the FED has started trying to talk down inflation by Verbal Intervention. This has improved the dollar and could turn the markets up in the short term, but i still have my doubts about the longer run.

My personal feeling is that they will try to come up with some scheme/s to control inflation which will include collaboration with other central banks and oil producing countries. Since they can't actually raise or decrease interest rates without adverse effects.

Will the scheme/s work? only time will tell but i am not as optimistic, hence my prediction for oil to go up.

Popular posts from this blog

My Master, A National Treasure

REPOST:  Its been more than two years since I posted on my sifu. This is probably the most significant posting I had done thus far that does not involve business or politics. My circle of close friends and business colleagues have benefited significantly from his treatment.

My Master, Dr. Law Chin Han (from my iPhone)

Where shall I start? OK, just based on real life experiences of those who are close to me. The entire Tong family (Bukit Kiara Properties) absolutely swear that he is the master of masters when it comes to acupuncture (and dentistry as well). To me, you can probably find many great dentists, but to find a real Master in acupuncture, thats a whole different ballgame.

I am not big aficionado of Chinese medicine or acupuncture initially. I guess you have to go through the whole shebang to appreciate the real life changing effects from a master.

My business partner and very close friend went to him after 15 years of persistent gout problem, he will get his heavy attacks at least…

PUC - An Assessment

PUC has tried to reinvent itself following the untimely passing of its founder last year. His younger brother, who was highly successful in his own right, was running Pictureworks in a number of countries in Asia.

The Shares Price Rise & Possible Catalysts

Share price has broken its all time high comfortably. The rise has been steady and not at all volatile, accompanied by steady volume, which would indicate longer term investors and some funds already accumulating nd not selling back to the market.

Potential Catalyst #1

The just launched Presto app. Tried it and went to the briefing. Its a game changer for PUC for sure. They have already indicated that the e-wallet will be launched only in 1Q2018. Now what is Presto, why Presto. Its very much like Lazada or eBay or Alibaba. Lazada is a platform for retailers to sell, full stop. eBay is more for the personal one man operations. Alibaba is more for wholesalers and distributors.

Presto links retailers/f&b/services originators with en…

How Long Will The Bull Lasts For Malaysia

Are we in a bull run? Of course we are. Not to labour the point but I highlighted the start of the bull run back in January this year... and got a lot of naysayers but never mind:

p/s: needless to say, this is Jing Tian ... beautiful face and a certain kind of freshness in her looks and acting career thus far

I would like to extend my prediction that the bull run for Bursa stocks should continue to run well till the end of the year. What we are seeing for the past 3 weeks was a general lull where volume suddenly shrunk but the general trend is still intact. My reasons for saying so:

a) the overall equity markets globally will be supported by a benign recovery complemented by a timid approach to raising rates by most central banks

b) thanks to a drastic bear run for most commodities, and to a lesser extent some oil & gas players, the undertone for "cost of materials" have been weak and has pr…