The sub-prime loss is all set to plunge the US economy to its worst ever crisis. In a latest review conducted by the ratings agency, Moody, the Wall Street banks have suffered a combined loss of about $110 billion on bonds backed by high-risk sub-prime mortgages.
Moody reviewed the fall out of the sub-prime lending crisis on the big US insurers like MBIA, Ambac, who guarantee a mortgage bond’s interest payments in the event of a default on the home loans that back them. The bond insurers are now left with insufficient fund to make payments on some of the bonds they insure.
The financial crisis suffered by insuring bogus home loan borrowers is posed to bring down the credit ratings of these companies. The decline in credit ratings will wipe out billions of dollars off the value of mortgage bond holdings of these companies by sending the signal to the market that their ability to guarantee interest payments had deteriorated.
Rating downgrade will bring downward pressure on the price of bonds eroding further investor’s confidence in the bond’s market. According to Chris Whalen of Institutional Risk Analytics, there is danger of loosing at least $30 billion on collateralized debt obligations (CDO). The bulk of other losses would come from decline in value of other mortgage-backed securities and structured investment vehicles (SIV).
The studies point out that the bond insurers are caught in a huge debt trap - a possible warning to similar institutions and financial concerns worldwide who resort to unintelligent lending to dubious borrowers to take advantage of a booming properties’ market.
Source: Times
