World’s financial institutions will face further write-downs

The world's financial institutions will face more securities write-downs combined with rising loan losses in the second half, Standard & Poor's Ratings Services said.
"The overlap of these two phases may prove to be the most difficult test yet for the battered global financial sector," said Standard & Poor's credit analyst Scott Bugie.
We believe that turbulent capital market conditions and continuing negative news from the U.S. mortgage market will lead to another large wave of write-downs in the second half of 2008.
The financial industry raised a huge amount of capital over the past year to compensate for securities losses. The present market conditions are less favourable, and financial institutions face this next wave of write-downs with reduced opportunities to raise additional capital.
The pain of the global financial industry remains largely linked to the declining fortunes of the U.S. housing sector. Securities backed by U.S. mortgage loans have lost hundreds of billions of dollars in value since summer 2007.
The losses have spread beyond subprime, which represents only 10%-15% of residential real estate borrowing in the U.S., to other pressured areas of U.S. housing finance.
Three prominent players–Citigroup Inc. (AA-/Negative/A-1+), Merrill Lynch & Co. Inc. (A/Watch Dev/A-1), and UBS AG (AA-/Negative/A-1+)–account for 40% of the more than $300 billion in write-downs of mortgage-backed securities (MBS) and leveraged loans taken through the first half of 2008.
Beyond that concentration, the write-downs have been spread geographically and by institution. Intermediaries and investors across the globe took part in the financing of highly leveraged U.S. households during the boom years; they consequently are bearing their share of losses from the decline.
The rare true sales of nonprime MBS in 2008 have been at depressed prices. The stunning collapse of Lehman Brothers Holdings Inc. (D/–/D) and the unwinding of the group's trades surely will place additional downward pressure on values of nonprime MBS via forced sales under unfavorable market conditions.
While the global industry likely has passed the halfway mark for write-downs, a wider range of MBS segments are at risk and all segments of MBS have deteriorated in recent months. We expect financial institutions with material residual balances of nonprime MBS to take significant additional write-downs in second-half 2008. In fact, this has already begun with the third-quarter earnings releases of the U.S. broker-dealers.