Western banks face $325 billion capital erosion: JPMorgan
08 Mar 2008
Mumbai: Banks across the US and Europe are facing a "systemic margin call" that may deplete $325 billion of their capital due to deteriorating subprime mortgages, JPMorgan Chase & Co said in a report.
JPMorgan report comes close on the heels of a report that the Carlyle Group's mortgage fund failed to meet $37 million in margin calls this week.
Carlyle Capital Corporation, which sent a default notice to Thornburg Mortgage Inc after the lender missed a $28 million margin call, said more default notices and margin calls were likely.
"A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," the JPMorgan report said.
The credit crisis stemming from US subprime mortgage loans are likely to intensify after US employment report "that most definitely signals recession," JPMorgan said.
US payrolls fell in February for a second consecutive month, causing 63,000 job losses, the biggest monthly decline in nearly five years, official data showed.
"The weak February employment report points to an economy in recession," the report said.
JPMorgan said US home prices are likely to fall 30 per cent, from its prior 25 per cent forecast. House prices have declined 14 per cent since mid-2006.
The risk of European banks defaulting also rose for the first time in four months as credit-market losses spread, according to credit-default swap traders.
Credit-default swaps are used to speculate on a company's ability to repay debt and as a proxy for corporate bonds or loans. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
Contracts on the Markit iTraxx Financial index of banks and insurers also jumped to as high as 153 basis points on Friday, surpassing the Markit iTraxx Europe index by 3.5 basis points, according to JPMorgan.
The Markit iTraxx Crossover index of 50 companies with mostly high-risk, high-yield credit ratings increased 23 basis points to 640, according to JPMorgan. A basis point on a credit-default swap contract protecting 10 million euros ($15.2 million) of debt from default for five years is equivalent to 1,000 euros a year.
In Tokyo, the Markit iTraxx Japan index soared as much as 31 basis points to 171, the biggest one-day move, according to Morgan Stanley.
Banks are hoarding cash and cutting lending to hedge funds as record US home foreclosures and loan defaults stoke concern financial firms may collapse.
Credit-default swaps on the benchmark CDX North America Investment-Grade Index fell 4 basis points to 181 basis points as of 8:37 am in New York, according to Deutsche Bank AG. The index has surged 109 basis points this year.
The Federal Reserve, meanwhile, expanded the amount of its short-term auctions to $100 billion in total in the central bank's latest effort to ease credit concerns.
