Tuesday, November 20, 2007

Slow Moving Train Wreck

Nov. 20 (Bloomberg) -- They dubbed it ``The Survivors' Conference.'' In early November, 2,000 people who handle asset- backed securities for a living crowded into a ballroom at the JW Marriott hotel in Orlando, Florida, just 3 miles from Disney World, to hear speaker after speaker explain why 2008 may be their worst year ever.

The subprime crisis, which has claimed the jobs of three chief executive officers and prompted more than $45 billion in writedowns at the world's biggest banks, may end up spilling into 2009.

``These events tend to become deeper and play out longer than most people initially expect,'' says Michael Mayo, an analyst who covers securities firms at Deutsche Bank AG in New York. ``This is one of the slowest-moving train wrecks we've seen.''

The tumbling U.S. housing market will continue to inflict the damage. Mortgage-backed securities and collateralized debt obligations containing those securities are falling in price and won't find their footing anytime soon. That's because most of the subprime mortgages, which provide collateral for $800 billion in securities, have yet to go bad, says Christopher Whalen of Hawthorne, California-based Institutional Risk Analytics.

``The collateral is not yet problematic,'' Whalen says. ``That's the next big shoe to drop.''

Housing Starts

Whalen says defaults will soar as the rates of low-interest ``teaser'' mortgages held by borrowers with poor credit move up. At the end of August, about $46 billion in subprime loans, representing 225,000 homes, had defaulted, according to Credit Suisse Group. The number will more than triple to $143 billion by the middle of 2009, the bank forecasts. Total subprime loan defaults will top out at about $270 billion, or 1.52 million homes, in 2010 or later.


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