Market Watch on the Subprime Mortgage Market

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MarketWatch.com has a commentary on the subprime mortgage market and the popping of the associated credit bubble. It’s main thesis is that while weaker companies will disappear, stronger, larger companies will be able to take the pain and therefore the correction will be quelled by these largest banks. Its a viable point, however I disagree with how the commentary is wrapped up:

But there is a big silver lining to this gathering cloud. Most subprime risk is held in large and diversified financial institutions, and their survival isn’t threatened. Wells Fargo, the market leader, can take the pain. So can General Motors and GE, which are big players. As long as US house prices don’t collapse, the chain of subprime dominoes need not grow very long.

That last sentence is troubling: "As long as US house prices don’t collapse…" is a premise that isn’t supported by the large amount of recent research dedicated to the US housing markets. Most of those reports use projections ranging from 20-40% depending on the analyst and the institution. While most of these banks would most likely not fail in a big liquidity crunch spurred by a large amount of foreclosures in the US market, they will be impacted significantly. It is happening now. HSBC, one of the biggest global lenders had a record profit year wiped out by over $10 billion in mortgage related losses, and we’re just getting started.

The largest banks are far larger today than the largest banks of yesteryear, but that doesn’t mean that they can stop the spiral; and if they can it won’t be because of the stabilizing US home prices.