S&P Says End in Sight for Writedowns on Subprime Debt

Standard & Poor's said the end is in sight for writedowns by the world's financial institutions on debt linked to subprime mortgages.

Writedowns from subprime-tied securities will probably rise to $285 billion, or $20 billion more than S&P forecast two months ago, the New York-based ratings company said today in a report. More than $150 billion of writedowns have been reported by banks, brokers and insurers, the firm said. S&P raised its estimate as it assumes deeper losses on collateralized debt obligations.

``The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation writedowns'' on subprime debt, S&P credit analyst Scott Bugie said in a statement. Losses on other debt such as leveraged loans are still likely to increase, the report said.

The world's largest banks and securities firms, led by Citigroup Inc., UBS AG and Merrill Lynch & Co., have reported more than $188 billion of mortgage-related losses since the start of last year, according to data compiled by Bloomberg. Subprime writedowns are coming not only at banks but also hedge funds, insurers and institutional investors, S&P said.

S&P's report helped prompt a rally in U.S. stocks and a decline in Treasuries. The S&P 500 Index rose 8.94 to 1317.71 as of 3:10 p.m. in New York, after earlier falling as low as 1282.11. The benchmark 10-year Treasury note erased gains after the S&P report. The note's yield increased 10 basis points to 3.54 percent. It earlier touched 3.38 percent, the lowest level since Jan. 23, the day after the central bank made an emergency cut in its target lending rate.

`Rigorously' Valued

S&P, Moody's Investors Service and Fitch Ratings have been criticized by lawmakers and regulators for failing to anticipate the record home foreclosures that led to a slump in securities linked to mortgages to people with poor credit. S&P assigned AAA ratings to about 85 percent of mortgage CDO classes created in 2005, 2006, and 2007, according to the report. Some AAA classes of CDOs lost all of their value last year.

``I don't want to be unduly skeptical here but the basis of the comments from S&P, I believe, require further examination,'' said Mike Mett, a retired lawyer and former counsel to the Wisconsin securities commissioner now in Fort Pierce, Florida.

Paulson Recommendations

U.S. Treasury Secretary Henry Paulson today delivered recommendations from the President's Working Group on Financial Markets in response to ``market turmoil'' that included reforms of ratings-firm rules to ensure ``integrity and transparency'' and reviews by regulators of how they use their assessments.

S&P's report focused on U.S. subprime asset-backed securities, and didn't take into account losses on such loans that haven't been packaged into bonds.

``It is clear that the ultimate credit losses on the more than $1.2 trillion of subprime loans originally granted in the U.S. from 2005 to 2007 will be substantial,'' S&P said.

Large banks such as Citigroup and Merrill Lynch, both of New York, ``have rigorously and conservatively valued their exposures,'' S&P said. ``Most of the damage should be behind them,'' the report said. ``Indeed, these institutions may benefit from future recoveries in market prices if the performance of subprime borrowers stabilizes and risk premiums for uncertainties dissipate.''

`High-Grade' CDOs

S&P said that it now expects larger losses from ``high- grade'' CDOs used to repackage asset-backed securities with AAA, AA or A ratings into new debt. Holdings of highly rated bonds backed by Alt-A mortgages, which are a step below subprime loans in terms of expected defaults, pose a risk to those CDOs, according to a report this week from Barclays Capital analysts. The high-grade CDOs also own top classes from other CDOs.

Citigroup and Merrill Lynch are already valuing the ``super- senior,'' or safest, classes of these CDOs at 52 percent and 68 percent discounts, S&P said, compared with 30 percent at the broader range of banks that own them.

As much as $75 billion of writedowns from subprime-tied CDOs will be offset by gains of the same amount because they'll stem from so-called credit-default swaps, S&P said. The swaps cover losses if securities aren't repaid as expected, in return for regular insurance-like premiums. Even so, the losses will damage financial firms' earnings, capital, and reputations, S&P said.

S&P said an end to subprime writedowns and increased disclosure probably won't be enough to staunch financial companies' losses.

Real Estate Market

Any positive effect ``will be offset by worsening problems in the broader U.S. real estate market and in other segments of the credit markets,'' S&P said.

``If the wider spreads hold to the end of the first quarter or half of this year, financial institutions will suffer further market value writedowns of a broad range of exposures,'' including high-yield corporate loans, commercial-mortgage securities, Alt-A mortgage securities, home-equity-loan securities, and European home-mortgage securities, S&P said.

Also excluded were potential additions to reserves against default protection on mortgage CDOs written by bond insurers, which S&P said so far total $12 billion. If banks decide to view those counterparties' creditworthiness as non-investment-grade, they'll probably report an additional $26 billion of losses, according to a separate report by S&P today.