Monday, 19 November 2007

Subprime strikes again

It's difficult to find a day when somebody is not writing down something related to subprime. From

Swiss Re to take $1.1 bln loss after insuring swaps

Swiss Re on Monday said it was taking a $1.1 billion (1.2 billion Swiss franc) loss after insuring a client's portfolio exposed to the U.S. subprime mortgage meltdown and related credit-market turmoil.

Swiss Re's credit solutions division had put together protection to insure an unnamed company against a "remote risk of loss" -- a loss that materialized after Standard & Poor's and Moody's Investors Services slashed the ratings of a variety of debt instruments last month and as liquidity dried up in more exotic asset classes.

The portfolios had exposure to subprime mortgages and, worse from the reinsurer's view, asset-backed collateralized debt obligations, which are portfolios of various debt securities. A number of companies, including funds run by Bear Stearns and General Electric, have reported similar losses on such CDOs.

Shares of Swiss Re dropped 5.2% in early Swiss trading.

According to Markit Group, an index tracking the value of AAA-rated subprime mortgage-backed bonds has dropped 20% over the last month.

Swiss Re has written the value of the CDOs to zero, and the subprime securities down by 62%. The value of the portfolio, which was worth over 5 billion francs, is now 3.6 billion francs after October. The transactions continue to be exposed to market value changes, but Swiss Re says marking the CDOs down to nothing will mitigate further losses.

It doesn't get any lower than marking down to zero. At least Swiss Re is being realistic, the stuff is worthless but no doubt there are plenty of institutions out there clinging on to this stuff with more optimistic outlooks. I'm sure the move by Swiss Re sends shivers down the spines of other CDO holders.