Pessimism, Good!

WSJ: Standard & Poor's now estimates that subprime write-downs could reach US$285 billion, US$20 billion higher than its estimate just six weeks ago, and is forecasting future pain for financial companies as the credit crisis moves beyond home loans. But the ratings agency also said "the end of write-downs is now in sight for large financial institutions. The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime asset-backed securities," said S&P credit analyst Scott Bugie, lead author of the report, in a statement.

While the hint of an end in sight helped to buoy the sinking stock market yesterday, Mr. Bugie's report was tempered. "We believe that any near-term positive impact of reducing subprime risk in the financial system via increased disclosure and write-downs will be offset by worsening problems in the broader U.S. real-estate market and in other segments of the credit markets," he said. The write-down estimate was boosted to reflect higher projected write-downs on high-grade collateralized debt obligations of asset-backed securities of 2006 and 2007 vintage.

S&P noted that the largest players have undertaken a "rigorous valuation methodology" in their subprime write-downs but that market forces could bring pressure for even more. The firm said that while there has been some deterioration in the first quarter, "the magnitude of some write-downs is greater than any reasonable estimate of ultimate losses."

Comments: Just like S&P to come out with the pessimism report, albeit 6 months late. It was largely the ratings agencies fault that we had the sub prime mess and over-leveraged effect of a lot of these similar instruments - they are the ones who just took the fees and rated these blardy instruments AAA. When they started collapsing, the ratings agencies were too slow to downgrade them. Now they are saying, well, forget what we said before, now the banks are in for it. What a load of crock-shit. Its good also that S&P came out with the report as it shows that the reversal is coming. Already the markets have factored another US$100bn of write downs from US banks. The rest should be coming from largely European side. Another 3%-5% downside from here and we should be in cherry picking territory. A rough gauge, DJII 11,500-11,750.