Investment banks to reveal sub-prime exposure

by Gill Montia

Story link: Investment banks to reveal sub-prime exposure

Leading investment banks such Lehman Brothers, Goldman Sachs and Morgan Stanley will be reporting their third-quarter figures this week and these are expected to begin to reveal the banks’ exposure to losses in the US sub-prime mortgage market.

Analysts will be scrutinising their valuation of securities linked to sub-prime loans, although investment banks can legitimately avoid writing down some of their billions of dollars of more illiquid assets, such as asset backed securities.

For assets to be marked down there needs to be what is known as an “active market” in the security.

Put another way, there has to be sufficient volume of willing buyers and sellers, and in current market conditions, this is not the case.

It will therefore be open for bankers to value some of their more illiquid assets according to more normal market conditions.

Merrill Lynch has already reported that it will have to make “requisite fair-valuation adjustments” on the securities on its books; the bank had £5.1 billion of securitised assets on its books at the end of June.

The US sub-prime mortgage crisis has already led analysts to reduce their profit forecasts for the leading investment banks.

In the case of Lehman Brothers, by 19%; Morgan Stanley 17% and for Goldman Sachs, 2%.

Forecasts are down by 48% for Bear Stearns because of the level of its exposure to sub-prime mortgages.