Another Loss Forecast on CDOs, This Time From J P Morgan Chase

The loss forecasts for various banks due to the housing crash are coming in regularly between $250B to $500B. The J P Morgan Chase forecast of $260B is coming in on the low end of this range, but their forecast only includes CDOs. Text in bold is my emphasis. From Bloomberg:

Losses on collateralized debt obligations at the world's biggest banks may double to $77 billion, JPMorgan Chase & Co. analysts predict.

Losses marketwide on CDOs linked to U.S. mortgages will reach about $260 billion, the New York-based JPMorgan analysts, led by Christopher Flanagan said in a report.

Merrill Lynch & Co., Citigroup Inc. and other banks that underwrote the so-called structured finance CDOs have already taken losses of at least $47.2 billion, a tally that also includes other holdings aside from CDOs. . . . .

. . . . .``One of the benefits of securitization is the offloading and global distribution of risk,'' the JPMorgan analysts wrote. ``Ironically, this is now a capital markets hazard, since no one is sure where subprime losses lurk.''

Structured finance CDOs repackage asset-backed debt including subprime-mortgage bonds and other CDOs into new securities with varying risks. CDO sellers including Merrill, Citigroup, UBS AG and Deutsche Bank AG are taking losses on the ``super-senior,'' or safest, pieces of the CDOs, according to JPMorgan. Writedowns on that debt should be between 20 and 80 percent, the analysts wrote.

The banks ended up holding so many super-senior classes of CDOs partly because they were forced to retain about two thirds of the securities when underwriting deals in 2006 and 2007 because of weak demand from other investors, the JPMorgan analysts wrote.

Other holdings came from promissory agreements and from banks seizing collateral on bad loans to hedge funds, the analysts said.

Some banks may have ``successfully hedged'' their exposure to CDOs, though the timing of the gains on the offsetting positions may not match the timing of losses, the analysts wrote.

Zurich-based UBS may lose $8.6 billion, Frankfurt-based Deutsche Bank may lose $5.1 billion, and New York-based Goldman Sachs Group Inc. may lose $5.1 billion, the report said.

With regard to bonds, bond insurers including Ambac Financial Group Inc. and MBIA Inc., which have ``taken few reserves,'' own CDOs that have had $29 billion in losses, JPMorgan estimated.

Losses on all subprime mortgage assets may reach $300 billion to $400 billion worldwide, Deutsche Bank analysts said Nov. 12. Credit losses on subprime, Alt-A and second mortgages made in the past three years will rise to $394 billion, excluding the effect of CDOs and credit-default swaps linked to the loans, UBS said.

Collateralized loan obligations, which repackage buyout loans and other high-yield company debt, may have lost $45 billion of value, the report said. The losses aren't ``credit-driven,'' the report said.