Super Senior Write-Downs to Drive $70 Bln of Losses
Write-downs to super senior collateralized debt obligation tranches will total about $60-70 billion for banks, brokers and monoline and mortgage insurers in coming months as total losses driven by residential and commercial mortgage delinquencies reach into the neighborhood of $200 billion, said JPMorgan Securities analysts. “It’s easy to dismiss [the sell-off of AAA and AA ABX tranches over the past months] as an isolated event with implications only for subprime mortgages,” Chris Flanagan, JPMorgan’s head of global structured products research, said during a call today. “But we think that is a big mistake. It has major implications in the financial sector, which we think has yet to be adequately priced.”
The AA 2007-1 ABX tranche price has fallen more than 30 basis points since September to about 48, and the AAA tranche has fallen 14 basis points to 82, as of Nov. 1.
Banks, broker and insurers have so far recognized about $30 billion to $40 billon of losses from residential and commercial mortgages, Flanagan said. Identifying investors in the remaining $100 billion of losses is difficult because with a lot of CDO exposure ending up back on bank balance sheets.
Derivative Fitch last week noted that some super senior tranches among $16 billion of CDOs placed on watch will default (TS, 10/30).