Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime US mortgages, J.P. Morgan Chase & Co, said in a report late on Friday. J.P. Morgan, which sent a default notice to Thornburg Mortgage Inc after the lender missed a $28 million margin call, said more default notices and margin calls were likely.
The Carlyle Group's mortgage fund also failed to meet $37 million in margin calls this week. "A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report co-authored by analyst Christopher Flanagan. "We would characterise this situation as a systemic margin call."
The credit crisis that began about a year ago will likely intensify after Friday's weak February US employment report "that most definitely signals recession," J.P. Morgan said.
Indeed, corporate bond spreads widened to a new record on Friday, surpassing levels seen in October 2002 during a boom in bankruptcies following the dot-com crash. US employers cut payrolls in February for a second consecutive month, slashing 63,000 jobs, the biggest monthly job decline in nearly five years, the US Labour Department reported on Friday.
"The weak February employment report points to an economy in recession," J.P. Morgan said. The J.P. Morgan report included a revised bleaker forecast for subprime-related home prices. The bank now sees prices falling 30 percent, from its prior 25 percent forecast. Those prices have declined 14 percent since mid-2006, J.P. Morgan said.
The US jobs results also came after the Federal Reserve expanded the amount of its short-term auctions to $100 billion in total in the central bank's latest effort to ease credit concerns. Ongoing concerns about bond insurers, known as monolines, and their effort to save their top ratings also are weighing on market sentiment.