Distressed asset indices fall sharply

By Aline van Duyn in New York

Published: January 15 2009 20:40 | Last updated: January 15 2009 20:40

Indices tracking the value of the trillions of dollars of distressed assets that continue to blight bank balance sheets fell sharply this week as a negative spiral of financial distress and subsequent economic pain continued.

The declines – which signal further potential writedowns by banks – are fuelling fears that the first quarter of this year could herald further pain for the financial system, even as many banks reveal sharp losses for the fourth quarter of 2008.

After several weeks of stabilisation and even some improvement, there have been renewed falls this week in the value of securities linked to subprime mortgages, leveraged loans and commercial mortgages.

The Markit ABX index for triple A rated securities backed by subprime loans has dropped 13 per cent in the past week. The Markit CMBX index for triple A rated securities backed by commercial mortgages was also down 14.5 per cent in the past week.

The LCDX index, a barometer of leveraged loans, was down 4.6 per cent in the past week, back to levels it traded at about a month ago. Many of the assets tracked by these indices are hard to value, and banks’ exposures are far from clear.

“Neither fresh government-sponsored capital nor other liquidity injections will dissipate the black cloud over the banks,” said Rob Smith, chief executive of NSM, an investment adviser.

The value of assets has been hit by general concerns about the depth of the global economic slowdown – which could result in more people and companies defaulting on debts.

The reintroduction last week in the US Senate of a bill aimed at amending the bankruptcy code to allow the modification of mortgage contracts – and its backing by Citigroup – also has sent tremors through the market for securities backed by mortgages not owned by agencies like Fannie Mae and Freddie Mac.

The increased chances of the passing of so-called bankruptcy cramdown bills – which allow judges to reduce the outstanding mortgage to match the value of the property it is based on – could continue to hurt mortgage assets.