Can You Top This Write-Off...

In a game of "can you top this" banking analysts in the U.S. and around the world are desperately trying to get a handle on the full extent of losses from the sub-prime credit crunch. Each day the estimates get more sobering.

According to an article today in Bloomberg, a Deutsche Bank analyst is predicting that "losses from the falling value of subprime mortgage assets may reach $300 billion to $400 billion worldwide.

Wall Street's largest banks and brokers will be forced to write down as much as $130 billion," as a result of the sup-prime credit crunch. That figure tops a similarly dire forecast floated last week by the Royal Bank of Scotland, which I reported on Friday (U.S. Banks, Brokers May Face $100 Billion in Additional Write-offs ).

Deutsche Bank's analysis reckons that 30% to 40% of the approximately $1.2 trillion in sub-prime mortgage loans outstanding will eventually default, while so far default rates are running in the mid-teens. "Banks and brokers may have to write off $60 billion to $70 billion this year," according to the report.

Over the past several months, big Wall Street firms have so far acknowledged about $40 billion in sub-prime related losses or asset write-offs. Presumably then we can expect a very sharp increase between now and year end.

The next big issue for investors to grapple with is pending re-valuation of billions in Level 3 assets sitting on the books of big Wall Street firms.

Jim Grant, of Grant's Interest Rate Observer worries about the lurking dangers posed by difficult to price Level 3 assets, "the valuation of which is very subjective." According to Grant, "if one were to mark these Level 3 assets to zero, then many of our leading financial institutions would be broke."

He's quick to point out that not all Level 3 assets may need to be written-down to such an extend, but the problem is that Wall Street hasn't been very forthcoming as yet in disclosing the full extent of losses, leaving investors to speculate, and fear for the worse.

The lack of disclosure about the true extent of sub-prime problems is perhaps because even Wall Street's masters-of-the-universe simply do not know just how bad things may get out there. And that's the really scary part!