Subprime Skeletons Are Still In The Closet

Freddie Mac (FRE) today reported a net loss of $151 million, or 66 cents a share, which was better than the 84 cent per share loss analysts had expected. Investors were happy with this, although in reality most of this was simply due to some new accounting rules which allowed Freddie to boost its earnings by around $1.3 billion. Freddie also said it would be raising $5.5 billion to help cushion any losses in its home loans. Considering that RealtyTrac, the online foreclosure site, reported it had seen a 65% increase in foreclosure notices compared to last year, lenders would need all the liquidity they can get.

Analysts are also concerned that British bank giant Barclays’ [BARC.L] numbers might not add up and that it might have to report further writedowns tomorrow. So far Barclays has reported just $4.5 billion in writedowns which seems little when compared with HSBC’s [HSBA.L] $18.3 billion or RBS’s (RBS) $11 billion. And if these numbers are so good, why have so many of the people running the credit businesses at Barclays Capital been shown the door in recent months? Is there something they - or their bosses - know that investors don’t?

Some are more optimistic though; Fitch Ratings believes that banks have already reported 80% of their subprime-related losses. So if banks have already announced around $165 billion in losses and that is 80%, then there’s only around $41 billion left to go. According to Fitch, the biggest losses so far have been concentrated on just a few major banks like Citi (C), Merrill Lynch (MER), UBS (UBS) and IKB, which accounted for 60% of losses reported. So the big question is whether the bulk of the remaining $41 billion of subprime losses that Fitch estimates are yet to be made public, will come from these same banks, or whether it will be spread over a wider range of financial institutions.

Comments

[JoeDunum]

How could you NOT believe anything Grace writes about? She's incredibly gorgeous and smart! What else does you need in a woman?

As for how I would play this news, I'd look into SKF, ProShares' UltraShort Financials (200% leverage).

Banks still have a few more quarters of losses that are inevitable.

[klemenv]

I agree with Fitch regarding subprime.

But here comes Alt-A! All that Option, Hybrid, ... , Alt-A mortgages. Many reset happened in Q1, so Q1+90 days there will be many foreclosures.

[Clavis]

As an Englishman, a put or two on Barclays might be worthwhile.

[Factsplz]

This is more of "the worst is over" hype to pretend there are no more problems. Goldman Sachs' analyst expects $700 billion more in write downs, Merideth Whitney of Oppenhiemer expects $45 billion at Citi alone. The bulk of the adjustable mortgages are coming this summer, with 1.5 million delinquent loans resetting. The worst may be over -- but maybe it is still coming. Notice how the inflation number was just 0.1% today as gasoline was down, or the April jobs number showed only 20,000 lost jobs, but Barron's analysis showed 296,000 lost jobs. The government is cooking the books -- so just wait.

[venividivici]

I don't know how you can trust anything that anyone in the financial system says. They did after all create this problem in the first place and they have got it wrong again and again and again.

[helplessobserver]

It looks to me that AIG has played the same game as MBIA and ABK and have used their insurance reserves to gamble in the CDS market. If so they are lossing big time. With the stock down about 43% from its high there's got to be real trouble here. Insurance regulators should be extremely concerned.

[Kamal Ahuja]

Grace, what's up with FMC? I think you meant FRE. You should ask the editors to remove your article from the FMC forum/board.

[sivere]

TakeBackTheFed.com

[Clavis]

Barclays lost 2.5% when they wrote off £1 billion.
Well done Grace