JPMorgan Chase & Co.'s news that its credit losses of the past month and a half already exceed its second-quarter losses is sobering proof that an end to the credit crisis is still far off.
“The market keeps surprising us,” said Octavio Marenzi, head of financial consultancy Celent. “It is difficult to say where the bottom is.”
The economy's continuing weakness and a lack of buyers for mortgage-backed securities and other troubled debt remain the greatest obstacles to improvement in the credit markets. Those factors are combining to send prices for the debt falling and in turn are forcing financial companies to again write down the value of their mortgage-backed holdings and report billions of dollars in extra losses.
“After a while, you can only write down so far,” Marenzi said. “The natural bottom is around zero, and we're rapidly approaching that point.”
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But, Marenzi said while values of securities are plummeting, it is not feasible for them to disappear completely.
Take for example mortgage-backed securities, which are investments whose underlying assets are pools of mortgages. Even if all the loans packaged together to create the securities defaulted, banks would still recover some money because they would then own the properties backed by the mortgages. After taking control of the properties, financial institutions would be able to sell them, recouping some of their losses from the mortgages – although that's a process the companies would rather avoid.
The problem in the market right now is that homeowners are continuing to default on their mortgages because of the weak economy.
Two separate turnarounds need to occur before mortgage-backed securities hit bottom and begin to recover – the broader economy needs to improve and investors need to start to purchase these investments again.
But Ladenburg Thalmann analyst Richard Bove said declining household wealth, rising unemployment and increasing costs for food, fuel and health care will likely lead to further delinquencies and defaults among mortgages and consumer loans.
“If the economy doesn't stabilize soon, it will cause problems,” Bove said.
New York-based JPMorgan Chase said late Monday the value of its mortgage securities holdings since July 1 have declined by $1.5 billion. The bank's second-quarter losses tied to deterioration in the credit markets totaled $1.1 billion.
Meanwhile, Swiss banking company UBS AG said it took $5.1 billion in write-downs during the second quarter because of its investments in troubled securities.