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OECD warns of mortgage debacle on equity markets

Wednesday, November 21st 2007 - 20:00 UTC
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U$D 890 billion of subprimes will have rates reset in 2008 U$D 890 billion of subprimes will have rates reset in 2008

The Organization for Economic Cooperation and Development, OECD said on Wednesday that overall losses caused by the U.S. mortgage market crisis could hit 300 billion US dollars and the broader credit crunch could yet inflict greater damage on equity markets.

"Thus far, equity investors seem to have shrugged off the negative sentiment that prevailed over the summer, but it may be too soon to draw firm conclusions" said the OECD report. "As adjustments have often occurred in waves, and as higher funding costs take typically several months to have their full impact on companies or consumers, it may well be that the recent correction is only a precursor of a more protracted downturn." Financial institutions and policymakers needed to buy time to ensure an orderly end to the trouble which spilled from the U.S. mortgage sector to financial markets globally last July-August, indicated the report on financial market trends. However OECD said the super fund being set up by Citigroup, Bank of America and JPMorgan Chase to pool securities of ailing special investment vehicles and thus preventing a further stampede sale of these asset-backed securities was "a useful mechanism", but "time is key to solving the turmoil". "We still have not hit the worst point in resets, delinquencies and ultimate losses on mortgages," the OECD said, adding some 890 billion of subprimes, or poor credit quality mortgages will have rates reset in 2008 -- peaking in March. The OECD report estimated a hypothetical 14% loss rate on subprime mortgages being reset in 2008 could deliver an overall 125 billion US dollars hit to lenders. Including "near prime", mortgages cumulative losses in the 200-300 billion range "seem feasible". The financial sector exposure to these losses lies mainly in holdings of mortgage-backed securities repackaged within complex Collateralised Debt Obligations (CDOs), variously held by hedge funds, banks and bank-sponsored structured investment vehicles. OECD estimates outstanding CDO and synthetic versions of these the CSO was close to 3 trillion US dollars in June, just before the worst of this year's crisis broke. With hedge funds having around 46% of that total CDO/CSO exposure, the report said this implied they held some 1.4 trillion US dollars before the crisis. Equivalent figures for banks would be 25% or 750 billion. Asset managers were estimated to have 19% exposure and insurers some 10% bringing their total to 865 billion.

Categories: Economy, International.

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