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Write-Downs Portend 4th-Quarter Mortgage Losses

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By STEPHEN BERNARD, The Associated Press

Published: November 15, 2007

NEW YORK - Billions of dollars in mortgage losses reported during the third quarter could be a prelude to bigger losses in the fourth quarter, as two more financial institutions warned of substantial write-downs Wednesday.

After financial services firms collectively took more than $40 billion in write-downs in the third quarter, early figures for the current quarter are approaching $30 billion.

"Fundamentals point toward write-downs being worse than those listed today," CIBC World Markets analyst Meredith Whitney said. "Everyday credit gets worse and the value of securities gets worse."
Bear Stearns Cos. and HSBC Holdings PLC were the latest to predict rising losses.
Bear Stearns Chief Financial Officer Samuel Molinaro Jr. said the investment bank will take a $1.2 billion write-down, leading the company to post an overall loss for its quarter ending Nov. 30. Much of that write-down is tied to the declining value of collateralized debt obligations, or CDOs.

CDOs are complex financial instruments that combine slices of assets and debt. Many CDOs are backed by subprime mortgages - loans given to customers with poor credit history. As those mortgages have increasingly defaulted, banks must write down the value of bonds and CDOs backed by the loans.

Credit rating agency Fitch Ratings cut Bear Stearns' short-term credit rating to "F1" from "F1+," the highest possible rating, because of earnings pressure given its exposure to the mortgage market.
Bear Stearns is coming off an $850 million write-down during the third quarter related to CDOs and subprime mortgages.

Investors appeared to approve of Bear Stearns' latest write-down announcement, however. Shares of Bear Stearns rose $2.40, or 2.4 percent, to close at $103.27.

Britain's HSBC said Wednesday that it too would take a mortgage-related charge, and will write down $3.4 billion for losses at its U.S. mortgage unit. It was HSBC's third write-down tied to the market in a year. Unlike Bear Stearns, the new charge would not lead to HSBC posting a quarterly loss.

Although prospects for the fourth quarter remain grim, the market actually could be bottoming out. Bear Stearns has been "working hard" to reduce its exposure to subprime mortgage investments, Molinaro said during a presentation at the Merrill Lynch Banking and Finance Conference in New York. As of Nov. 9, Bear Stearns had about $884 million in exposure to CDOs and negligible exposure to subprime mortgages remaining on its books.

Bear Stearns' latest round of write-downs should "suffice" in accurately valuing the investments, Molinaro said.

Goldman Sachs Group, considered among the best risk managers of Wall Street, does not expect to take any write-downs in its fiscal fourth quarter, chief executive Lloyd Blankfein said Tuesday.

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