Subprime crisis to produce deeper problems: IMF
Analytical work modeled on conservative assumptions suggests that potential losses may be higher and further capital injections are likely. Business Humour | Day in Pics
By Agencies |
WASHINGTON: The US subprime mortgage crisis will likely produce deeper problems than expected because not all market players have "come out clean" about their losses, the International Monetary Fund said on Wednesday.
"Some analytical work modeled on conservative assumptions suggests that potential losses may be higher and further capital injections are likely," Manmohan Singh and Mustafa Saiyid wrote in an IMF report.
"Most banks in the United States have not yet marked their assets to genuine transaction prices," the report said.
Some market participants "have come out clean such as a few US hedge funds that have written off the value of all junior notes issued by its structured vehicles," the report said.
The global markets turmoil that erupted last year amid rising defaults on US subprime mortgages was in part due to a lack of appropriate measures to evaluate the risk of new financial products.
Subprime mortgages -- home loans given to people with poor credit histories -- were packaged into structured securities such as collateralized debt obligations, of CDOs.
Following the collapse of the US subprime market in mid-2007, market worries about the exposure of the structured securities to the subprime crisis caused a credit freeze that made many market players use valuation models that no longer worked in the meltdown, the report said.
"Some analytical work modeled on conservative assumptions suggests that potential losses may be higher and further capital injections are likely," Manmohan Singh and Mustafa Saiyid wrote in an IMF report.
"Most banks in the United States have not yet marked their assets to genuine transaction prices," the report said.
Some market participants "have come out clean such as a few US hedge funds that have written off the value of all junior notes issued by its structured vehicles," the report said.
The global markets turmoil that erupted last year amid rising defaults on US subprime mortgages was in part due to a lack of appropriate measures to evaluate the risk of new financial products.
Subprime mortgages -- home loans given to people with poor credit histories -- were packaged into structured securities such as collateralized debt obligations, of CDOs.
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Following the collapse of the US subprime market in mid-2007, market worries about the exposure of the structured securities to the subprime crisis caused a credit freeze that made many market players use valuation models that no longer worked in the meltdown, the report said.
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Recent moves by financial institutions to bring off-balance-sheet structures like CDOs on the balance sheet are not at explicit "transfer prices" and thus "may not be a full reflection of potential losses."
The IMF report suggested that market participants seek to regularly put a portion of their complex structured securities on the market to obtain a valid valuation.
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Some market players "increasingly relied on ratings as a measure of default risk and inappropriately compared them to those on plain vanilla corporate debt, which has different sensitivities to market conditions."
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