Market Puts Faith in S&P Subprime Estimate

123jump.com Staff
13 Mar, 2008
New York City

U.S. stocks rebounded from earlier losses after S&P credit analyst estimated total losses related to subprime loans of $285 billion. The statement further added that nearly 65% of these losses are already announced. The relatively positive tone in the note lifted mood in trading and financial and consumer stocks rebounded. S&P and other agencies are at the heart of the credit market malaise as they rated 85% of subprime loans issued between 2005 and 2007 as AAA, many of these are now worthless.

[R]2:45PM New York – U.S. stocks reverse their earlier course on an optimistic statement from S&P on the size of subprime losses.[/R]

Market averages rebounded from the loss of nearly 200 points in the Dow Jones Industrial Average and S&P 500 declining 26 points.

S&P credit analyst Scott Bugie in a research note revised estimate for the subprime loan losses to $285 billion, up $20 billion from his estimates in January. He cautioned in the research note that losses from other loans including leveraged loans to fund private equity buyouts, collateralized loans, and consumer debts are still likely to rise.

Though market reversed its course after the release of the research note, 123jump.com estimates differs sharply from the conclusions. Housing market may deteriorate in the next few months as more people fall behind their mortgage payments and nearly 10 million home owners have negative equity. This will only contribute to the rising losses related to subprime loans. German Finance Minister at the end of G7–nations meeting had suggested that subprime loan losses may rise as much as $400 billion.

Of the loan losses that are disclosed so far, total for subprime loans related losses are less than $190 billion as of March 10th according to the data compiled by 123jump.com.

S&P 500 had rated 85% of subprime loans issued between 2005 and 2007 as AAA and many of these loans are now nearly worthless. S&P and other rating agencies also indicated in the summer of 2007 that loan losses related to subprime are not likely to exceed more than $50 billion.

S&P and other rating agencies derive their income from rating of these loan securities that are issued by brokerage houses and regulators and lawmakers have been critical of these agencies as many of these loans have gone sour.

Airlines, banks, brokerages, and consumer spending related stocks rebounded.

AMR Corp, the parent of American Airlines ((AMR)) rebounded from the low of $8.50 to $10.06, Merrill Lynch ((MER)) rose 97 cents to $45.89, and MasterCard ((MA)) rebounded from a low of $196 to $210.40.

Bear Stearns ((BSC)) fell $6.82 to $54.96 but fell as low as $50.48.