Mounting sub-prime losses

You would have read about the sub-prime write-downs recently by UBS AG as part of their Q1, 2008 results. They have written down more than USD19 billion worth of sub-prime investments for the first quarter of 2008. Cumulatively they have written down USD37 billion over the last 2 quarters. However big the bank may be, it is very difficult to replenish capital to the extent of USD37 billion over the last 6 months.

The total write-offs by global banks and financial institutions in respect of sub-prime investments has already crossed USD300 billion. Several other banks would be declaring their first quarter results in the next couple of weeks and one can expect loads of further write-downs.


What is in store for the future?

1. Many of the global institutions have raised fresh capital to meet these losses. However, the new capital will be required to replenish the losses, and will not result in fresh liquidity getting released in the financial markets.

2. These big banks and investment banks are big lenders to the hedge funds and other prime broking clients. There is a possibility that their credit lines may be cut forcing hedge funds to square off positions in equities/commodities markets to repay the loans.

The most scary part is the lack of clarity on the magnitude of these losses. Even now, estimates by Lehman Brothers and Goldman Sachs range from 400 billion to a trillion dollars. Hence, it is prudent to exercise caution here and one can safely assume that banks will have to make further provisions in 2008.